Which tax charges the average rate rises with income?

Which tax charges the average rate rises with income?

• A. Progressive Tax
• B. Proportional Tax
• C. Regressive Tax
• D. Credit Worthiness

Answer: (A)

A tax where the rate rises as income increases causes the average tax rate to rise with income. When higher portions of income are taxed at higher rates, the total tax grows faster than income, boosting the portion of income paid in taxes as earnings go up. For example, imagine two brackets: 10% on the first $10,000, 20% on income above that up to $40,000, and 30% on income beyond $40,000. Someone earning $15,000 pays $1,000 plus $1,000 = $2,000 in tax, for an average rate of about 13.3%. Someone earning $60,000 pays $1,000 + $6,000 + $6,000 = $13,000 in tax, for an average rate of about 21.7%. The higher earner ends up paying a larger share of income in taxes, showing how the average rate rises with income. In contrast, a proportional tax charges a constant rate regardless of income, so the average rate stays the same as income changes. A regressive tax takes a larger share of income from lower earners, so the average rate would fall as income rises. And credit worthiness isn’t a tax type at all.

A tax where the rate rises as income increases causes the average tax rate to rise with income. When higher portions of income are taxed at higher rates, the total tax grows faster than income, boosting the portion of income paid in taxes as earnings go up.

For example, imagine two brackets: 10% on the first $10,000, 20% on income above that up to $40,000, and 30% on income beyond $40,000. Someone earning $15,000 pays $1,000 plus $1,000 = $2,000 in tax, for an average rate of about 13.3%. Someone earning $60,000 pays $1,000 + $6,000 + $6,000 = $13,000 in tax, for an average rate of about 21.7%. The higher earner ends up paying a larger share of income in taxes, showing how the average rate rises with income.

In contrast, a proportional tax charges a constant rate regardless of income, so the average rate stays the same as income changes. A regressive tax takes a larger share of income from lower earners, so the average rate would fall as income rises. And credit worthiness isn’t a tax type at all.