Question

5. Understanding marginal and average tax rates Consider the economy of Pomistan, where citizens consume only apples. Assume that apples are priced at $1 each. The government has devised the following tax plans: Plan A • Consumption up to 1,000 apples is taxed at 50%. • Consumption higher than 1,000 apples is taxed at 20% Plan B • Consumption up to 2,000 apples is taxed at 10%. . Consumption higher than 2,000 apples 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 levels of 500 apples, 1,500 apples, and 2,500 apples, respectively Plan B Consumption Level plan A Quantity of apples) Marginal Tax Rate Average Tax Rate (Percent) (Percent) Marginal Tax Rate (Percent) Average Tax Rate (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, Progressive Proportional Regressive

Answer 1

Consumption level	Plan A M.T.R.	Plan A A.T.R	Plan B M.T.R.	Plan B A.T.R
500	50%	50%	10%	10%
1500	20%	((1000*.5+500*.2)/1500)*100= 40%	10%	10%
2500	20%	((1000*.5+1500*.2)/2500)*100= 32%	25%	((2000*0.1+500*.25)/2500)*100=13%

Marginal tax rate is the percentage of tax applied to the income level.

Average tax rate= (Tax paid/ Total expenditure)*100

Plan A= Regressive tax

reason- When Tax income increases, Average tax rate decreases

Plan B= Progressive tax

reason- When tax income increases, Average tax rate increases.

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