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Suppose a government generates its revenue using a lump-sum income tax of $20,000 per person regardless of income. Calculate
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Answer #1

Average ta rate = (tax paid/ total income)*100

Marginal tax rate is the percentage of tax levied on additional income earned.

That is, the proportion of tax paid on each extra dollar earned.

Here, tax is a lump sum $20,000 irrespective of the income.

So, if some one earns a dollar he/she doesn't need to pay any extra tax on that additional dollar earned. The amount of tax paid is independent of the income earned.

So, marginal tax rate is 0% in each case.

Income level 50000

ATR = (20000/50000)*100 =40%

Income level 75000

ATR = (20000/75000)*100 = 26.67%

Income level 100000

ATR = (20000/100000)*100 = 20%

Income level 125000

ATR = (20000/125000)*100 = 16%

Income level 150000

ATR =(20000/150000)*100 = 13.33%

Income margmal Rate. $50,ooo $75,00 o $ 100,000 $ 125,000 $150, ooo Average Rate 40.1 0 26.67% 20 ) 16.1. 13. 33 -1.

As income increases, the average tax rate decreases. It means for high income levels, the burden of tax is lesser than for low income levels. As income level increases, the burden of tax decreases.

Therefore,

This lump sum income tax is a regressive tax.

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