The Design of the Tax System (Mobile-Enabled) Graded Assignment | Read Chapter 1
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The Design of the Tax System (Mobile-Enabled) Graded Assignment | Read Chapter 12 | Back to Assignment Due Monday 07.09.18 at 02:45 AM Keep the Highest: /2 Attempts: 6. 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 15%. . Consumption higher than 2,000 apples is taxed at 35%. 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, 1,200 apples, and 2,500 apples, respectively Consumption Level (Quantity of apples) Plan A Plan B Marginal Tax Rate (Percent) Average Tax Rate (Percent) Marginal Tax Rate (Percent) Average Tax Rate (Percent) 500 1,200 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 Save & Continue Continue without savingExplanation / Answer
Plan A:
The tax rate on the last quantity of consumption is marginal tax rate.
In case of 500 quantity the marginal tax rate is 50%, since the consumption is below 1,000 quantity.
In case of 1200 quantity the marginal tax rate is 20%, since the consumption is above 1,000 quantity.
In case of 2500 quantity the marginal tax rate is 20%, since the consumption is above 1,000 quantity.
Average tax rate = (Total tax / Total quantity) × 100
Average tax rate for 500 quantity consumption = {(500 × 50%) / 500} × 100
= (250 / 500) × 100
= 50%
Average tax rate for 1200 quantity consumption = {(1000 × 50% + 200 × 20%) / 1200} × 100
= (540 / 1200) × 100
= 45%
Average tax rate for 2500 quantity consumption = {(1000 × 50% + 1500 × 20%) / 2500} × 100
= (800 / 2500) × 100
= 32%
Plan B:
The tax rate on the last quantity of consumption is marginal tax rate.
In case of 500 quantity the marginal tax rate is 15%, since the consumption is below 2,000 quantity.
In case of 1200 quantity the marginal tax rate is 15%, since the consumption is below 2,000 quantity.
In case of 2500 quantity the marginal tax rate is 35%, since the consumption is above 2,000 quantity.
Average tax rate = (Total tax / Total quantity) × 100
Average tax rate for 500 quantity consumption = {(500 × 15%) / 500} × 100
= (75 / 500) × 100
= 15%
Average tax rate for 1200 quantity consumption = {(1200 × 15%) / 1200} × 100
= (180 / 1200) × 100
= 15%
Average tax rate for 2500 quantity consumption = {(2000 × 15% + 500 × 35%) / 2500} × 100
= (475 / 2500) × 100
= 19%
Plan A is regressive, since higher consumption leads to lower tax rate (50% to 20%).
Plan B is progressive, since higher consumption leads to higher tax rate (15% to 35%).
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