Question

Public Finance, text book by Rosen & Gayer 10th ed. Chapter 14, question #7. Question #14: Suppose the the income tax in a certain nation is computed as a flat rate of 5 percent, but no tax is levied above $50,000 in taxable income. Taxable income, in turn, is computed as the individual's income minus $10,000; that is everyone gets a $10,000 deduction. What are the marginal and average tax rates for each of the following three workers? (Evaluate the marginal tax rate at each person's current income level.) a. A part-time worker with annual income of &9,000. b. A retail salesperson with annual income of $45,000. c. An advertising executive with annual income of $600,000. Is the tax progressive, proportional, or regressive with respect to income?

Answer 1

As from the below table we have compute the marginal rate of income tax from three different individuals.

Part time worker have income less than $10000 which leads to no taxable income and zero tax. whereas advertisement professional have income of $600000 which leads to taxable income only upto $50000 and that also with benefit of standard deduction of $ 10000.

In respect to tax slabs it proves that there is regressive tax in that nation as marginal rate reduced with increase on income from $45000 to $ 600000. Progressive will be the case where tax amount increase with every penny increase in income and proportional will case where same marginal rate arises. So in this case this is regressive tax.

Taxable Income subject to Tax up to Marginal Rate Name of PersonAnnual IncomeStandard Deduction max $50000 Tax Rate $50000 ( C)= (A)-(B Part Time worker 9,000.00 45,000.00 6,00,000.00 10,000.00 10,000.00 10,000.00 5% Retail Sales person Advertisement Executive 35,000.00 5% 1750 4% 5,90,000.00 5% 2500 0.42%