Question

1.1 Which of the following is incorrect (not true) about marginal and average tax rates?

In a proportional income tax system, the marginal tax rate is higher than the average tax rate.

In a regressive income tax system, the marginal tax rate is lower than the average tax rate.

None of the listed answers is incorrect.

In a progressive income tax system, the marginal tax rate is higher than the average tax rate.

1.2

Which of the following represents an example of a regressive income tax?

Someone with an income of $20,000 pays $2,000 in taxes to the government, and a person with income of $80,000 pays $7,000 in taxes.

Someone with an income of $20,000 pays $2,000 in taxes to the government, and a person with income of $30,000 pays $4,000 in taxes.

Someone with an income of $20,000 pays $2,000 in taxes to the government, and a person with income of $40,000 pays $5,000 in taxes.

Someone with an income of $20,000 pays $2,000 in taxes to the government, and a person with income of $40,000 pays $4,000 in taxes.

Answer 1

Question 1.1

Proportional income tax system is the income tax system in which tax rate is fixed irrespective of the taxable income.

Due to this, in this case, marginal tax rate is always equal to average tax rate in case of proportional income tax system.

So,

The correct answer is the option (1).

Question 1.2

Income = $20,000

Tax paid = $2,000

Average tax rate = Tax paid/Income = $2,000/$20,000 = 0.10 or 10%

Income = $80,000

Tax paid = $7,000

Average tax rate = Tax paid/Income = $7,000/$80,000 = 0.0875 or 8.75%

The average tax rate is decreasing as the income is increasing.

When the average tax rate increases as the income increases, tax system is regressive.

Hence, the correct answer is the option (1).