Certified Financial Management Specialist Practice Exam

Which of the following describes a Progressive Income Tax system?

1. All taxpayers pay the same rate

2. Higher earners pay lower tax rates

3. Higher earners pay higher tax rates

4. Tax rates vary by region

The correct answer is: Higher earners pay higher tax rates

A Progressive Income Tax system is characterized by higher earners paying higher tax rates. This means that as an individual's income increases, the percentage of income paid in taxes also increases. The tax brackets are structured in such a way that those at the top income levels are taxed at a higher rate than those at lower income levels, effectively redistributing wealth and helping to reduce income inequality. In contrast, a system where all taxpayers pay the same rate indicates a flat tax structure, which does not account for income differences and can disproportionately impact lower-income individuals. Similarly, if higher earners were to pay lower tax rates, it would contradict the progressive nature of the tax system and would typically benefit wealthier individuals at the expense of the broader tax base. Lastly, varying tax rates by region does not address the core principle of progressiveness based on income level, as it introduces geographical factors instead of solely focusing on income level disparities. Thus, the defining characteristic of a Progressive Income Tax system is that those who earn more contribute a higher percentage of their income in taxes.