IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation
A progressive tax is one where the average tax rate rises with income. Which of the following structures is progressive?
The 10% rate above a Rs 3 lakh exemption is progressive because the average rate equals 10% times (income minus 3 lakh) divided by income, which rises with income. The flat rate is proportional, and the fixed charge and falling-rate options are regressive.
- AA flat 18% rate on all income with no exemption
- BA fixed Rs 5,000 charge on every taxpayer
- CA uniform 10% rate on all income above an exemption limit of Rs 3 lakh, with nothing belowCorrect
- DA rate of 30% on income up to Rs 5 lakh and 10% above that
- A lump-sum levy that falls as a percentage as income rises
Explanation
With an exemption limit and a constant rate above it, average rate = 10% x (Y - 3)/Y, which rises with Y toward 10%, so it is progressive. A flat tax with no exemption is proportional. A fixed charge and a falling-rate structure are regressive.
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