Why is VAT considered a regressive tax?

Value-Added Tax (VAT) is considered a regressive tax primarily because it takes a larger percentage of income from low-income consumers compared to high-income consumers. Since VAT is applied uniformly to goods and services regardless of the purchaser's income level, it tends to impact individuals with less disposable income more heavily.

For lower-income consumers, a larger portion of their income is spent on consumption, which means they pay a higher effective tax rate relative to their income. In contrast, higher-income individuals are able to save a larger percentage of their income, causing the tax burden from VAT to be smaller in proportion to their overall wealth. This characteristic of VAT leads to its classification as regressive, which is an important concept in understanding how different tax structures can impact various economic groups differently.

The other options do not accurately reflect the nature of VAT. Luxury goods are not the sole taxable items under VAT, not all regions impose it at the same rate, and it applies to both domestic and foreign goods, rather than being limited to foreign imports only.