Define the following terms and explain their importance to the study of economics:

a. regressive tax
b. proportional tax
c. progressive tax
d. direct tax
e. indirect tax

a. A regressive tax is one in which the average tax rate falls as income rises. A regressive tax violates the vertical equity principle of taxes.
b. A proportional tax is one in which the average tax rate is the same at all income levels. The payroll tax has the appearance of being a proportional tax, although in reality it is regressive. A flat-rate income tax is a proportional tax if there are no loopholes or exemptions.
c. A progressive tax is one in which the average tax rate paid by an individual rises as income rises. Progressive taxation is an important element of vertical equity in taxes.
d. A direct tax is levied directly on people or corporate entities. Direct taxes include the personal income tax, corporate profits taxes, and inheritance taxes. The incidence of a direct tax generally cannot be shifted.
e. Indirect taxes are levied on an economic activity. Examples of indirect taxes include excise taxes and sales taxes. The incidence of indirect taxes is often shifted from the producer, or seller of a good or service, to the consumer.