A tax takes a smaller percentage of taxable income as taxable income rises. How is it classified by its…

Divide tax paid by taxable income to obtain the average tax rate. A declining average rate as income rises is regressive.

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A tax takes a smaller percentage of taxable income as taxable income rises. How is it classified by its average tax rate?

Answer and explanation

Correct answer B

Divide tax paid by taxable income to obtain the average tax rate.

A declining average rate as income rises is regressive.

Option A

A progressive tax takes a rising percentage of income as income increases.

Option B

A regressive tax takes a falling percentage of income as income increases.

Option C

A proportional tax takes a constant percentage of income.

Option D

Indirect tax is a different classification. The question asks how the average tax rate changes as income rises.