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

What type of tax structure is associated with a system where higher income earns a higher rate?

1. Flat tax

2. Regressive tax

3. Progressive tax

4. Value-added tax

The correct answer is: Progressive tax

The correct answer is related to a tax structure designed to levy higher rates on those with higher incomes, thereby adhering to the principle of equity where individuals contribute based on their ability to pay. In such a system, the tax rate increases as a taxpayer's income increases. This approach is intended to redistribute wealth and reduce income inequality. The progressive tax structure is characterized by multiple tax brackets, where each tier of income is taxed at a different rate, with the rates rising as one's income moves into higher brackets. This design promotes fairness in taxation by ensuring that those who can afford to contribute more do so, aligning with social welfare goals. While a flat tax applies a single rate regardless of income level, a regressive tax imposes a higher burden on lower-income earners relative to their income, effectively decreasing as income rises. A value-added tax is a consumption tax levied on the value added to goods and services at each stage of production, which is unrelated to income levels. Therefore, the progressive tax is distinct in its aim to tax higher income earners at increasing rates, making it the correct choice linked to the context of the question.