Which of the following best describes a regressive tax?

• A. A tax where the average tax rate decreases as income increases.
• B. A tax that is only applied to luxury goods.
• C. A tax where the average tax rate increases as income increases.
• D. A tax where everyone pays the same percentage of their income.

Answer: (A)

Verified step by step guidance

1. Understand the concept of tax structures: Taxes can be classified based on how the average tax rate changes with income.
2. Define a regressive tax: It is a tax where the average tax rate decreases as income increases, meaning lower-income individuals pay a higher proportion of their income compared to higher-income individuals.
3. Compare with other tax types: A progressive tax has an average tax rate that increases with income, a proportional tax has a constant average tax rate regardless of income, and a tax on luxury goods is a specific type of excise tax, not defined by income rate changes.
4. Identify the correct description: Since a regressive tax means the average tax rate falls as income rises, the statement 'A tax where the average tax rate decreases as income increases' best describes a regressive tax.
5. Confirm understanding by eliminating other options: The other options describe progressive, proportional, or specific excise taxes, which do not match the definition of a regressive tax.