Consider the economy of Pomistan, where citizens consume only apples. Assume tha
ID: 1195198 • Letter: C
Question
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 10%. Consumption higher than 2,000 apples 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 apples, 1,200 apples, and 2,500 apples, respectively. Complete the following table by indicating whether each plan is a progressive tax system, a proportional tax system, or a regressive tax system.Explanation / Answer
The marginal tax rate is the percentage of tax applied to your income for each tax bracket in which you qualify. In essence, the marginal tax rate is the percentage taken from your next dollar of taxable income above a pre-defined income threshold.
In the above plan A, when one consumes 600 apples, then the consumption of additional apple is taxed at the rate of 50%. Therefore, the marginal tax rate is 50%. Similarly, when one consumes more than 1000 apples, then the consumption of each additional apple is taxed at the rate of 20%. Therefore, the marginal tax rate is 20%.
In the above plan B, when one consumes apples less than 2000, then the consumption of additional apple is taxed at the rate of 10%. Therefore, the marginal tax rate is 10%. Similarly, when one consumes more than 2000 apples, then the consumption of each additional apple is taxed at the rate of 25%. Therefore, the marginal tax rate is 25%.
The average tax rate is calculated by dividing the total tax paid by total taxable income.
In plan A,
For the consumption of 600 apples, total amount paid = $600 & therefore total tax paid = $600 * 0.5 = $300
=> Average tax rate = 300 / 600 = 0.5 = 50%
Similarly for the consumption of 1200 apples, total amount paid= $1200 &
therefore total tax paid = ($1000 * 0.5) + ($200 * 0.2) = $500 + $40 = $540
=> Average tax rate = 540 / 1200 = 0.45 = 45%
Similarly for the consumption of 2500 apples, total amount paid = $2500 &
therefore total tax paid = ($1000 * 0.5) + ($1500 * 0.2) = $500 + $300 = $800
=> Average tax rate = 800 / 2500 = 0.32 = 32%
In plan B,
For the consumption of 600 apples, total amount paid = $600 & therefore total tax paid = $600 * 0.1 = $60
=> Average tax rate = 60 / 600 = 0.1 = 10%
Similarly for the consumption of 1200 apples, total amount paid = $1200 &
therefore total tax paid = $1200 * 0.1 = $120
=> Average tax rate = 120 / 1200 = 0.1 = 10%
Similarly for the consumption of 2500 apples, total amount paid = $2500 &
therefore total tax paid = ($2000 * 0.1) + ($500 * 0.25) = $200 + $125 = $325
=> Average tax rate = 325 / 2500 = 0.13 = 13%
Consumption Level
(Quantity of Apples)
Marginal tax
rate (%)
Average tax
rate (%)
Marginal tax
rate (%)
Average tax
rate (%)
A progressive tax is a tax in which the taxrate increases as the taxable amount increases. The term "progressive" refers to the way the tax rate progresses from low to high, with the result that a taxpayer's averagetax rate is less than the person's marginal taxrate.
A regressive tax takes a larger percentage from low-income people than from high-income people. Therefore, the tax rate reduces as the amount to be taxed increases, with the result that a taxpayer's averagetax rate is greater than the person's marginal taxrate.
In proportional tax rate, the tax rate is fixed and hence donot changes with the changes in the taxable amount.
In the above case, Plan A follows regressive tax system whereas Plan B follows progressive tax system.
Consumption Level
(Quantity of Apples)
Plan A Plan BMarginal tax
rate (%)
Average tax
rate (%)
Marginal tax
rate (%)
Average tax
rate (%)
600 50 50 10 10 1,200 20 45 10 10 2,500 20 32 25 13