In which type of tax system does the average tax rate increase as GDP rises?

• A. Proportional tax system
• B. Progressive tax system
• C. Flat tax system
• D. Regressive tax system

Answer: (B)

Verified step by step guidance

1. Understand the definition of the average tax rate, which is the total tax paid divided by the total income or GDP, expressed as \(\text{Average Tax Rate} = \frac{\text{Total Tax Paid}}{\text{GDP}}\).
2. Review the characteristics of different tax systems: In a proportional tax system, the average tax rate remains constant regardless of income; in a regressive tax system, the average tax rate decreases as income rises; in a flat tax system, the tax rate is constant across all income levels.
3. Focus on the progressive tax system, where the tax rate increases as income or GDP increases, meaning higher income earners pay a larger percentage of their income in taxes.
4. Recognize that because the tax rate increases with income in a progressive tax system, the average tax rate also increases as GDP rises.
5. Conclude that the tax system where the average tax rate increases as GDP rises is the progressive tax system.