Pleae help with this entire problem, thank you. Consider the economy of Cocoland
ID: 1202079 • Letter: P
Question
Pleae help with this entire problem, thank you.
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 15%. Consumption higher than 2,000 coconuts 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 coconuts, 1, 200 coconuts, and 2,500 coconuts, 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
Marginal tax rate implies tax rate applied to the bracket in which taxable income of consumer falls.
Average tax rate is calculated by dividing total amount of tax paid divided by total income.
AS per Plan A -
1. Consumption upto 1,000 coconuts is taxed at 50%.
2. Consumption higher than 1,000 coconuts is taxed at 20%.
Consumption of 500 coconuts -
Total consumption = 500 coconuts
Price of 1 coconut = $1
Value of consumption = 500 * $1 = $500
This consumption fall in bracket 1 of tax plan A. So, marginal tax rate on consumption of 500 coconuts is 50%.
Calculate amount of tax -
Tax amount = $500 * 50/100 = $250
Calculate average tax rate -
Average tax rate = (Tax amount/Total consumption) * 100 = (250/500) * 100 = 50%
The average tax rate on consumption of 500 coconuts is 50%.
Consumption of 1,200 coconuts -
Total consumption = 1,200 coconuts
Price of 1 coconut = $1
Value of consumption = 1,200 * $1 = $1,200
This consumption fall in bracket 2 of tax plan A. So, marginal tax rate on consumption of 1,200 coconuts is 20%.
Calculate amount of tax -
Tax amount = ($1,000 * 50/100) + ($200 * 20/100) = 500 + 40 = 540
Calculate average tax rate -
Average tax rate = (Tax amount/Total consumption) * 100 = (540/1,200) * 100 = 45%
The average tax rate on consumption of 1,200 coconuts is 45%.
Consumption of 2,500 coconuts -
Total consumption = 2,500 coconuts
Price of 1 coconut = $1
Value of consumption = 2,500 * $1 = $2,500
This consumption fall in bracket 2 of tax plan A. So, marginal tax rate on consumption of 2,500 coconuts is 20%.
Calculate amount of tax -
Tax amount = ($1,000 * 50/100) + ($1,500 * 20/100) = $500 + $300
Calculate average tax rate -
Average tax rate = (Tax amount/Total consumption) * 100 = (800/2,500) * 100 = 32%
The average tax rate on consumption of 2,500 coconuts is 32%.
AS per Plan B -
1. Consumption upto 2,000 coconuts is taxed at 15%.
2. Consumption higher than 2,000 coconuts is taxed at 35%.
Consumption of 500 coconuts -
Total consumption = 500 coconuts
Price of 1 coconut = $1
Value of consumption = 500 * $1 = $500
This consumption fall in bracket 1 of tax plan B. So, marginal tax rate on consumption of 500 coconuts is 15%.
Calculate amount of tax -
Tax amount = $500 * 15/100 = $75
Calculate average tax rate -
Average tax rate = (Tax amount/Total consumption) * 100 = (75/500) * 100 = 15%
The average tax rate on consumption of 500 coconuts is 15%.
Consumption of 1,200 coconuts -
Total consumption = 1,200 coconuts
Price of 1 coconut = $1
Value of consumption = 1,200 * $1 = $1,200
This consumption fall in bracket 1 of tax plan B. So, marginal tax rate on consumption of 1,200 coconuts is 15%.
Calculate amount of tax -
Tax amount = $1,200 * 15/100 = $180
Calculate average tax rate -
Average tax rate = (Tax amount/Total consumption) * 100 = (180/1,200) * 100 = 15%
The average tax rate on consumption of 1,200 coconuts is 15%.
Consumption of 2,500 coconuts -
Total consumption = 2,500 coconuts
Price of 1 coconut = $1
Value of consumption = 2,500 * $1 = $2,500
This consumption fall in bracket 2 of tax plan B. So, marginal tax rate on consumption of 2,500 coconuts is 35%.
Calculate amount of tax -
Tax amount = ($2,000 * 15/100) + (500 * 35/100) = 300 + 175 = 475
Calculate average tax rate -
Average tax rate = (Tax amount/Total consumption) * 100 = (475/2,500) * 100 = 19%
The average tax rate on consumption of 2,500 coconuts is 19%.
Following is the complete table -
Consumption
Plan A
Plan B
Marginal tax
Rate
Average tax
Rate
Marginal tax
Rate
Average tax
Rate
500
50
50
15
15
1,200
20
45
15
15
2,500
20
32
35
19
A tax system is said to be regressive when tax rate decreases as income increases. On the other hand, a tax system is said to be progressive when tax rate increases as income increases.
As above table shows that in case of Plan A, tax rate is decreasing as income or consumption is increasing there for tax plan A is of regressive nature. On the other hand in case of Plan B, tax rate is increasing as income or consumption is increasing there for tax plan B is of progressive nature.
So,
Plan A is a regressive tax system.
Plan B is a progressive tax system.
Consumption
Plan A
Plan B
Marginal tax
Rate
Average tax
Rate
Marginal tax
Rate
Average tax
Rate
500
50
50
15
15
1,200
20
45
15
15
2,500
20
32
35
19