Which tax does not affect incentives or behavior and is considered non-distortionary?

• A. Lump-sum tax
• B. Progressive income tax
• C. Sales tax
• D. Tariff

Answer: (A)

The key idea is about how taxes influence people’s choices. A lump-sum tax is a fixed amount everyone pays regardless of their behavior or decisions. Because it doesn’t change the relative rewards of working more, consuming, or saving, it doesn’t alter marginal incentives or the trade-offs people face. In other words, there’s no tax-induced wedge that would shift the slope of the budget line or the marginal benefit of an extra hour of work, so behavior is not distorted by the tax.

In contrast, other taxes change those incentives. A progressive income tax raises the marginal tax rate as income rises, which tends to dampen the extra earnings from working more and thus alters labor supply. A sales tax adds to the price of goods, changing relative prices and influencing what people buy. A tariff raises the cost of imports, affecting prices and choices in trade and production. All of these create distortions in behavior and allocations.

So, the lump-sum tax is the one that does not distort incentives and is considered non-distortionary.