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

Sales tax is typically considered what kind of tax?

1. Progressive

2. Regressive

3. Flat

4. Capital gains

The correct answer is: Regressive

Sales tax is typically considered a regressive tax because it takes a larger percentage of income from low-income individuals than from high-income individuals. This is due to the nature of sales tax being a fixed percentage of the price paid for goods and services, irrespective of the buyer's income level. Consequently, as income decreases, a greater proportion of that income is spent on taxable purchases, thus disproportionately affecting those with lower incomes. In contrast, a progressive tax would mean that higher earners pay a larger percentage of their income in taxes, making it more equitable as it aligns with the ability to pay principle. A flat tax implies a single tax rate for all taxpayers, regardless of income level, which doesn't apply to sales tax. Capital gains tax relates specifically to the profits from the sale of assets or investments, which is a different category altogether. Therefore, identifying sales tax as regressive highlights its impact on lower-income households in the taxation system.