Which of the following best describes a 'Regressive Tax' system?
- The tax rate increases as the taxpayer's income increases
- The tax rate remains constant regardless of the taxpayer's income
- The tax rate decreases as the taxpayer's income increases, placing a heavier relative burden on the poor
- The tax is levied exclusively on corporate profits and capital gains
Answer: The tax rate decreases as the taxpayer's income increases, placing a heavier relative burden on the poor
In a regressive tax system, lower-income individuals pay a higher percentage of their total income in taxes compared to the wealthy. Indirect taxes like GST or sales tax are inherently regressive because a poor person and a billionaire pay the exact same absolute tax amount on a loaf of bread, but that tax constitutes a much larger slice of the poor person's total income.