When firms are taxed on a proportional basis, it is _____________.

Direct Tax

The correct answer is option (1) : Direct Tax

The government sector affects the personal disposable income of households by making transfers and collecting taxes. It is through this that the government can change the distribution of income and bring about a distribution that is considered ‘fair’ by society. This is the redistribution function. The redistribution objective is sought to be achieved through progressive income taxation, in which higher the income, higher is the tax rate. Firms are taxed on a proportional basis, where the tax rate is a particular proportion of profits. So, direct taxes can be progressive (the tax rate increases as the taxable amount increases), proportional (the tax rate is fixed, it does not change when the taxable base amount increases or decreases).