Question

< Back to Assignment Attempts: Keep the Highest: 12 11. 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 5%. • Consumption higher than 1,000 apples is taxed at 40%. Plan B • Consumption up to 2,000 apples is taxed at 40%. • Consumption higher than 2,000 apples is taxed at 10%. 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 600 apples, 1,400 apples, and 2,500 apples, respectively. Consumption Level (Quantity of apples) Plan A Marginal Tax Rate Average Tax Rate (Percent) (Percent) Plan B Marginal Tax Rate Average Tax Rate (Percent) (Percent) 600 1,400 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 Plan A Plan B Grade It Now DEY Save & Continue Continue without savir

Answer 1

Answer:

Plan A:

When the consumption level of 600 apples,

Marginal tax rate = 5%

Total Tax = 5% * 600 = 0.05 * 600 = $30

Average tax = tax paid / total income * 100 = 30 / 600 * 100 = 5%

Average tax rate = 5%

When the consumption level of 1400 apples,

Marginal tax rate = 40%

Total Tax = 5% * 1000 + 40%(1400 – 1000) = 0.05*1000 + 0.40*400 = $210

Average tax = tax paid / total income * 100 = 210 / 1400 * 100 = 15%

Average tax rate = 15%

When the consumption level of 2500 apples,

Marginal tax rate = 40%

Total Tax = 5% * 100 + 40%*(2500 – 1000) = 0.05*1000 + 0.40*1500 = $650

Average tax = tax paid / total income * 100 = 650 / 2500 * 100 = 26%

Average tax rate = 26%

Plan B:

When the consumption level of 600 apples,

Marginal tax rate = 40%

Total Tax = 40% * 600 = 0.4 * 600 = $240

Average tax = tax paid / total income * 100 = 240 / 600 * 100 = 40%

Average tax rate = 40%

When the consumption level of 1400 apples,

Marginal tax rate = 40%

Total Tax = 40% * 1400 = 560

Average tax = tax paid / total income * 100 = 560 / 1400 * 100 = 40%

Average tax rate = 40%

When the consumption level of 2500 apples,

Marginal tax rate = 10%

Total Tax = 40%*2000 + 10%(2500 – 2000) = 0.4*2000 + 0.10*500 = $850

Average tax = tax paid / total income * 100 = 850 / 2500 * 100 = 34%

Average tax rate = 34%

Plan A is following progressive tax system because average tax rate increases with the increase in taxable income.

Plan A is following progressive tax system because average tax rate decreases with the increase in taxable income.

Consumption Level	Plan A		Plan B
Quantity of apples	Marginal tax rate	Average Tax Rate	Marginal tax rate	Average Tax Rate
600	5%	5%	40%	40%
1400	40%	15%	40%	40%
2500	40%	26%	10%	34%

	Progressive	Proportional	Regressive
Plan A	Yes
Plan B			Yes