Question

8. Understanding marginal and average tax rates Consider the economy of Citronia, where citizens consume only oranges. Assume that oranges are priced at $1 each. The government has devised the following tax plans: Plan A • Consumption up to 1,000 oranges is taxed at 50%. • Consumption higher than 1,000 oranges is taxed at 20%. Plan B • Consumption up to 2,000 oranges is taxed at 10%. Consumption higher than 2,000 oranges is taxed at 25%. Use the Plan A and Plan B tax schemes to complete the following table by deriving the marginal and average tax rates under each tax plan at the consumption level of 500 oranges, 1,500 oranges, and 2,500 oranges, respectively. Consumption Level (Quantity of oranges) Plan A Plan B Marginal Tax Rate Average Tax Rate Marginal Tax Rate Average Tax Rate (Percent) (Percent) (Percent) (Percent) 500 1,500 2,500 Complete the following table by indicating whether each plan is a progressive tax system, a proportional tax system, or a regressive tax system. Plan A Plan B Progressive 0 0 Proportional Regressive 0 0 0 0

Answer 1

	Plan A		Plan B
Consumption level	Marginal tax rate	Average tax rate	Marginal tax rate	Average tax rate
500	50	500*0.50/500*100 = 50	10	500*0.10/500*100 = 10
1500	20	1000*0.50+500*0.20/1500*100 = 40	10	1500*0.10/1500*100 = 10
2500	20	1000*0.50+1500*0.20/2500*100 = 32	25	2000*0.10+500*0.25/2500*100 = 13

Plan A is Regressive

Plan B is Progressive