Question

Suppose an income tax is imposed that takes $2,000 from someone with an income of $20,000, $2,500 from someone with an income of $30,000, and $4,000 from someone with an income of $80,000. This tax would be classified as

Answer 1

Answer: Regressive tax

Explanation:

Regressive tax refers to a tax regime where the tax rate reduces as the level of income increases.

In the above scenario, the income tax rates are:

$20,000 income = 2,000 / 20,000 = 10%

$30,000 income = 2,500 / 30,000 = 8.3%

$8,000 income = 4,000 / 80,000 = 5%

Notice how the tax rates reduced as the income earned went up. This is why this is a regressive tax regime.