Certified Financial Management Specialist Practice Exam

In which situation would a progressive tax system be considered equitable?

1. All individuals contribute equally

2. Higher income earners contribute a higher percentage of their income

3. It provides fixed tax rates for all

4. Lower-income individuals do not pay taxes

The correct answer is: Higher income earners contribute a higher percentage of their income

A progressive tax system is designed to impose a higher tax rate on individuals with higher income levels. This approach is considered equitable because it aims to distribute the tax burden according to the taxpayer’s ability to pay. Higher income earners can afford to contribute a larger percentage of their income without facing significant financial strain, thus balancing the tax responsibilities among citizens. This system promotes social equity and helps fund essential public services that benefit all segments of society, particularly those who may be less able to contribute at the same rate. By asking more from those who have greater financial resources, the system provides relief to lower-income individuals, who may struggle to meet their basic needs. Other options do not embody the principles of fairness associated with a progressive tax system. Equal contributions from all individuals disregard disparities in financial capabilities, leading to undue hardship for lower-income earners. Fixed tax rates for everyone ignore individual circumstances and can disproportionately impact those with less income. Finally, if lower-income individuals were completely exempt from paying taxes, it would remove their stake in the system and reduce the support for public services that they rely on.