2) How are deductions regressive? (Hint: think about taxpayers with different MT

Question

2) How are deductions regressive? (Hint: think about taxpayers with different MTRs.) 3) Imagine the following scenario. Gaetano picks olives from his tree and sells them to Fred for $5. Fred takes the olives and presses them into olive oil, which he sells to Wong for $7. Wong packages the olive oil and he displays it in his store, on sale for $10, where Nathan buys the bottle of olive oil. a) If the tax system is a retail sales tax system, and the tax rate is 20% (exclusive), who pays the tax and what is the total amount of tax paid? b) If the tax system is a VAT system with credits, and the tax rate is 20% (exclusive), who pays the tax and what is the total amount of tax paid? (It will help if you keep track of the credits. You can consult the VAT.gif image on Canvas or the Slemrod & Bakija reading (see below) for help on this.) c) Which system do you think will lead to less tax evasion, and why?

Explanation / Answer

Regressive tax system is the opposite of progressive taxation. In this, tax rate falls as income of people increases, so this tax system impacts more poor people with lower income and less rich people with higher income. Thus, in regeressive taxation, deductions are regressive because of the fall in tax rate as income rises and hence, the payment of tax decreases as income increases.

Sales tax and value-added tax both are indirect tax yet there is a difference in payment and imposition of both type of taxes. Sales tax is imposed on final goods and services produced while value-added tax is imposed on every stage of value addition.Sales tax is paid by consumers to the retailers while value-added tax is paid by all purchasers at every stage of production to the suppliers.

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