Regressive Nature of Indirect Taxes

Steps:

• Regressive taxes impose a higher burden on low-income groups as a percentage of income.
• VAT applies a flat 20% rate to all purchases of goods and services, regardless of buyer's income.
• Low-income households spend a larger share of their income on consumption, facing more VAT relative to earnings.
• High-income households save or invest more, spending a smaller income share on taxed items, reducing their effective tax rate.

Why B is correct:

• By definition, regressive taxes like VAT result in high-income earners paying a lower percentage of income in tax due to lower consumption propensity.

Why the others are wrong:

• A: Describes progressive taxation, where higher earners pay more as a percentage.
• C: Reverses the regressive effect, implying lower burden on low-income groups.
• D: Indicates proportional taxation, not regressive.

Final answer: B