Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

What is a key characteristic of a regressive tax structure?

1. Tax rate increases with income

2. Tax rate decreases with income

3. Flat tax rate for all

4. Only applies to corporate income

The correct answer is: Tax rate decreases with income

A key characteristic of a regressive tax structure is that the tax rate decreases as income increases. This means that individuals with lower incomes pay a higher percentage of their income in taxes compared to those with higher incomes. This contrasts with a progressive tax system where higher income earners pay a higher tax rate. In a regressive system, essential goods or services, which are often consumed more by lower-income individuals, are typically taxed at a higher rate, leading to a disproportionate impact on those lower earners. While options like a flat tax rate or specific application to corporate income might describe other tax structures, they do not capture the essence of a regressive tax. The defining nature of a regressive tax is its inverse relationship between income level and tax rate, thereby placing a heavier burden on lower-income earners.