Question

Which of the following statements is true? a. \(A\) sales tax on food is a regressive tax. b. The largest source of federal government tax revenue is individual income taxes. c. The largest source of state and local government tax revenue is sales taxes. d. All of the above are true.

Short answer

The correct answer is a combination of the individual true statements: a sales tax on food is a regressive tax (a) and the largest source of federal government tax revenue is individual income taxes (b). Statement c is false, as property taxes are often a more significant source of revenue for state and local governments than sales taxes.

Step-by-step solution

Understanding Regressive Tax

A regressive tax is a tax that takes a larger percentage of income from low-income earners than from high-income earners. In other words, as a person's income decreases, the burden of the tax becomes a higher proportion of their overall income. Now, let's consider the statements.

Evaluating Statement a

Statement a states, "A sales tax on food is a regressive tax." Sales tax on food is considered a regressive tax because everyone has to pay the same tax rate, regardless of their income. Since lower-income families spend a higher proportion of their income on food, sales tax on food has a larger impact on them compared to those with higher incomes. Therefore, statement a is true.

Evaluating Statement b

Statement b says, "The largest source of federal government tax revenue is individual income taxes." According to financial reports and data from the U.S. government, individual income taxes indeed make up the largest source of federal tax revenue. So, statement b is also true.

Evaluating Statement c

Statement c states, "The largest source of state and local government tax revenue is sales taxes." While sales taxes do contribute to state and local government tax revenue significantly, property taxes are often a more significant source of revenue for state and local governments. Therefore, statement c is false.

Conclusion

Based on the analysis, we conclude that statements a and b are true, while statement c is false. So, the correct answer is not "All of the above are true," but rather, a combination of the true individual statements a and b.

Key concepts

Regressive Tax

A regressive tax is a type of tax system where the tax rate effectively decreases as the income of the taxpayer increases. This means that individuals with lower incomes end up spending a larger proportion of their income on tax compared to those with higher incomes. Sales taxes are a classic example of regressive taxes. Since they are applied uniformly to all consumers regardless of income, they tend to disproportionately affect those with lower incomes.
For example, if there is a sales tax on food, everyone pays the same rate at the checkout. However, because lower-income households spend a larger share of their income on necessities like food, this tax represents a higher percentage of their total income compared to higher-income households. This makes sales taxes regressive, impacting those who can least afford it the most. Understanding how regressive taxes work can help policymakers consider fair taxation methods that do not disproportionately burden low-income earners.

Federal Tax Revenue

Federal tax revenue is the money collected by the federal government primarily to fund national programs and services such as defense, healthcare, and social security. The largest component of federal tax revenue in the United States comes from individual income taxes. Individual income taxes are the taxes that citizens and residents pay based on the salaries and wages they earn. This form of taxation is typically progressive, meaning that tax rates increase as income levels rise, ensuring that those who earn more pay a higher rate of tax. By collecting taxes in this manner, the federal government can gather substantial revenue necessary to manage national priorities, while also attempting to balance the scales of income distribution. It's this reliance on individual income taxes that plays a significant role in forming the backbones of the country's fiscal budget and economic health.

State and Local Government Taxes

State and local governments accumulate revenue through various taxes to fund public services like education, infrastructure, and public safety. Although sales taxes are substantial sources of revenue, they are not always the largest. Instead, property taxes often take the lead in contributing to state and local budgets. Property taxes are levied based on the value of real estate properties, meaning homeowners bear the cost. These taxes generally provide a steady and key source of funding for local governments, which rely on them for a significant portion of their budgets. Since property values tend to increase over time, property tax revenues can also rise, helping to keep up with the growing needs of local communities. These differences highlight how levels of government diversify their income sources to best meet the specific needs and economic situations of their regions, while also reflecting varying degrees of reliance on differing forms of taxation.