Financial Counseling Certification Program (FiCEP) Practice Exam

In what instance is a regressive tax system considered unfair?

1. It benefits high-income earners

2. It taxes low-income earners at the same rate as high-income earners

3. It only applies to luxury items

4. It creates a larger tax burden for the middle class

The correct answer is: It taxes low-income earners at the same rate as high-income earners

A regressive tax system is typically considered unfair when it levies the same tax rate on all individuals, regardless of their income level. This means that low-income earners end up paying a larger proportion of their income compared to high-income earners, effectively placing a heavier financial burden on those who can least afford it. In a regressive structure, the tax system doesn't take into account the ability to pay; thus, both low-income and high-income earners can be taxed at the same flat rate, which disproportionately affects those with lesser financial resources. For instance, if a flat tax rate of 10% is applied, a person earning $30,000 would pay $3,000, which constitutes 10% of their income. However, a person earning $300,000 would also pay $30,000, which is only 10% of their income. The relative impact of the tax on the lower earner is significantly more burdensome. Therefore, when assessing fairness within a tax context, a regressive tax system is typically criticized for failing to account for differing levels of income and the resulting impact on individuals’ financial well-being. Other choices do not capture the essence of the unfairness associated with a regressive tax system as