A Level Economics AQA Practice Exam

What characterizes progressive taxation?

1. The percentage of tax decreases as income increases

2. A fixed tax rate applied to all income levels

3. The percentage of tax increases as income increases

4. Taxes that only apply to wealthier citizens

The correct answer is: The percentage of tax increases as income increases

Progressive taxation is characterized by a tax system where the percentage of tax paid increases as the income level rises. This means that individuals or entities with higher incomes pay a higher percentage of their income in taxes compared to those with lower incomes. The rationale behind this system is based on the principle of ability to pay, which suggests that those who have greater economic resources should contribute a larger share to fund public goods and services. This approach aims to reduce income inequality by ensuring that wealthier individuals contribute more significantly to government revenues, which can then be utilized for social programs that benefit the broader population. It contrasts with regressive tax systems, where lower income individuals might pay a higher proportion of their income in taxes, and proportional systems where everyone pays the same percentage regardless of income level. By designing a tax structure that takes into account the varying capacities to pay, progressive taxation helps to achieve a more equitable distribution of the tax burden, contributing to a fairer society.