Consider the economy of Cocoland, where citizens consume only coconuts. Assume t
ID: 1117687 • Letter: C
Question
Consider the economy of Cocoland, where citizens consume only coconuts. Assume that coconuts are priced at $1 each. The government has devised the following tax plans: Plan A ·Consumption up to 1,000 coconuts is taxed at 50%. ·Consumption higher than 1,000 coconuts is taxed at 20%. Plan B ·Consumption up to 2,000 coconuts is taxed at 10%. . Consumption higher than 2,000 coconuts is taxed at 25%. 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 coconuts, 1,200 coconuts, and 2,500 coconuts, respectively. Plan A Plan B Consumption Level (Quantity of coconuts) Marginal Tax Rate (Percent) Average Tax Rate Marginal Tax Rate (Percent) Average Tax Rate (Percent) 600 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 BExplanation / Answer
Marginal tax rate is just the tax rate for which an individual is eligible for. Average tax rate can be computed by dividing the total tax with total taxable income
When there are 600 coconuts as income, plan A will carry a marginal tax rate of 50%. Since tax is 300 coconuts, average tax rate is also 50%. Under plan B, when there are 600 coconuts as income, plan B will carry a marginal tax rate of 10%. Since tax is 60 coconuts, average tax rate is also 10%.
When there are 1200 coconuts as income, plan A will carry a marginal tax rate of 20%. Since tax is (1000*50% + 200*20%) = 540 coconuts, average tax rate is 540/1200 = 45%. Under plan B, when there are 1200 coconuts as income, plan B will carry a marginal tax rate of 10%. Since tax is 120 coconuts, average tax rate is also 10%.
When there are 2500 coconuts as income, plan A will carry a marginal tax rate of 20%. Since tax is (1000*50% + 1500*20%) = 800 coconuts, average tax rate is 800/2500 = 32%. Under plan B, when there are 2500 coconuts as income, plan B will carry a marginal tax rate of 25%. Since tax is (2000*10% + 500*25%) = 325 coconuts, average tax rate is also 325/2500 = 13%.
Plan A is regressive and Plan B is progressive.