You can show that a tax on consumption is regressive using the Keynesian consump

Question

You can show that a tax on consumption is regressive using the Keynesian consumption function. Suppose C= 1,000 + .5 Yd, and the government collects 10% of all consumption expenditures in taxes. Calculate the taxes paid by the household earning Yd= 1,000 with the household earning Yd= 10,000. Show that the consumption tax is regressive - show your math. You can show that a tax on consumption is regressive using the Keynesian consumption function. Suppose C= 1,000 + .5 Yd, and the government collects 10% of all consumption expenditures in taxes. Calculate the taxes paid by the household earning Yd= 1,000 with the household earning Yd= 10,000. Show that the consumption tax is regressive - show your math.

Explanation / Answer

C = 1000 + 0.5Yd

Tax, T = 10% x C

When Yd = 1000, C = 1000 + (0.5 x 1000) = 1000 + 500 = 1500

So, T = 10% x 1500 = 150

Average tax rate = T / Yd = 150 / 1000 = 15%

If Yd = 3000, C = 1000 + (0.5 x 3000) = 1000 + 1500 = 2500

T = 10% x 2500 = 250

Average tax rate = 250 / 3000 = 8.33%

So, as Yd (and consumption) increases, average tax rate decreases, signifying a regressive consumption tax.

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