5. Computing and interpreting average tax rates In a hypothetical economy, Loren

Question

5. Computing and interpreting average tax rates In a hypothetical economy, Lorenzo earns $17,000, Neha earns $34,000, and Sam earns $51,000 in annual income. The folowing table shows the annual taxable income and tax liability for these three single individuals. For example, Lorenzo, who earns $17,000, owes $5,610 in taxes. Use the tax liability figures provided to complete the following table by computing the average tax rate for Lorenzo, Neha, and Sam with an annual income of $17,000, $34,000, and $51,000, respectively. Taxable Income (Dollars) 17,000 34,000 51,000 Tax Liability (Dollars) 5,610 7,820 9,180 Average Tax Rate (Percent,) Taxable Income LorenzO Neha Sam The income tax system for this country is

Explanation / Answer

(a) Average tax rate = Tax liability / Taxable income

Lorenzo: $5,610 / 17,000 = 0.33 = 33%

Neha: $7,820 / $34,000 = 0.23 = 23%

Sam: $9,180 / $51,000 = 0.18 = 18%

(b) Income tax system is Regressive.

Since average tax rate falls with increase in taxable income, this is regressive taxation system.

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