ACCA Certification Practice Test 2025 – All-in-One Guide to Secure Your Chartered Success!

A regressive tax system is characterized by the fact that it takes a larger percentage of income from low-income individuals compared to higher-income individuals. In this system, as income decreases, the tax burden increases in proportion to the individual's earnings. This means that low-income individuals pay a higher proportion of their income in taxes, which can exacerbate economic inequality.

For instance, a sales tax is a common example of a regressive tax; regardless of a person’s income level, everyone pays the same rate on purchases, leading low-income individuals to pay a larger proportion of their income towards the tax when spending on basic necessities.

In contrast, proportional tax systems charge the same percentage of income, regardless of total income, which means the tax burden is consistent across income levels. Progressive tax systems are designed to impose higher rates on higher incomes, placing a heavier burden on wealthier individuals. Ad valorem taxes are based on the value of property rather than income and do not fit into the context of income disparity.

Therefore, a regressive tax system clearly illustrates how low-income individuals bear a heavier financial burden relative to their earnings, which makes it the correct answer.