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

Which of the following is an example of a regressive tax?

1. Property tax

2. Sales tax

3. Income tax

4. Estate tax

The correct answer is: Sales tax

A regressive tax is one in which the tax rate decreases as the taxable amount increases, impacting lower-income individuals more heavily relative to their income. Sales tax serves as an example of this because it is levied uniformly on purchases, meaning that all consumers pay the same rate regardless of their income level. Consequently, lower-income individuals spend a larger portion of their income on taxable goods and services compared to higher-income individuals, leading to a higher tax burden in relation to their income. In contrast, a property tax is typically based on the value of the property owned, which can disproportionately affect lower-income homeowners who may have less wealth overall. Income tax is generally progressive, where higher incomes are taxed at higher rates, thus placing a larger burden on those who can afford to pay more. Estate tax is based on the value of an estate upon the death of the owner and usually affects wealthier individuals more directly. These factors illustrate how sales tax functions as a regressive tax, affecting lower-income individuals most significantly.