your password for this site? Ing marginal and 6. Und Consider the economy of Pom

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your password for this site? Ing marginal and 6. Und Consider the economy of Pomistan, where citizens consume only apples. Assume that apples are priced at $1 each. The government has devised t following tax plans: Conalder the economy of Pomstan, where citizens Plan A Plan B Consumption up to 1,000 apples is taxed at 50%. Consumption up to 2,000 apples is taxed at 10%. . consumption higher than 1,000 apples is taxed at 20%, . 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. Plan A Plan B Consumption Level (Quantity of apples) Marginal Tax Rate (Percent) Average Tax Rate (Percent) 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

Explanation / Answer

Taking Plan A -

Case I

Consumption level = 600 apples

Apples are priced at $1 each.

So, total consumption is $600.

Tax brackets are as follows -

1. Consumption upto 1,000 apples is taxed at 50%.

2. Consumption higher than 1,000 apples is taxed at 20%.

Consumption of 600 apples applied to first tax bracket.

So, marginal tax rate in case of consumption of 600 apples is 50%.

Amount of tax = $600 * (50/100) = $300

Average tax = (Amount of tax/Taxable consumption) * 100 = ($300/$600) * 100 = 50%

So, average tax rate in case of consumption of 600 apples is 50%.

Case II

Consumption level = 1,200 apples

Apples are priced at $1 each.

So, total consumption is $1,200.

Tax brackets are as follows -

1. Consumption upto 1,000 apples is taxed at 50%.

2. Consumption higher than 1,000 apples is taxed at 20%.

Consumption of 1,200 apples applied to second tax bracket.

So, marginal tax rate in case of consumption of 1,200 apples is 20%.

Amount of tax = $1,000 * (50/100) + $200 * (20/100) = $540

Average tax = (Amount of tax/Taxable consumption) * 100 = ($540/$1,200) * 100 = 45%

So, average tax rate in case of consumption of 1,200 apples is 45%.

Case III

Consumption level = 2,500 apples

Apples are priced at $1 each.

So, total consumption is $2,500.

Tax brackets are as follows -

1. Consumption upto 1,000 apples is taxed at 50%.

2. Consumption higher than 1,000 apples is taxed at 20%.

Consumption of 2,500 apples applied to second tax bracket.

So, marginal tax rate in case of consumption of 2,500 apples is 20%.

Amount of tax = $1,000 * (50/100) + $1,500 * (20/100) = $800

Average tax = (Amount of tax/Taxable consumption) * 100 = ($800/$2,500) * 100 = 32%

So, average tax rate in case of consumption of 2,500 apples is 32%.

Taking Plan B -

Case I

Consumption level = 600 apples

Apples are priced at $1 each.

So, total consumption is $600.

Tax brackets are as follows -

1. Consumption upto 2,000 apples is taxed at 10%.

2. Consumption higher than 2,000 apples is taxed at 25%.

Consumption of 600 apples applied to first tax bracket.

So, marginal tax rate in case of consumption of 600 apples is 10%.

Amount of tax = $600 * (10/100) = $60

Average tax = (Amount of tax/Taxable consumption) * 100 = ($60/$600) * 100 = 10%

So, average tax rate in case of consumption of 600 apples is 10%.

Case II

Consumption level = 1,200 apples

Apples are priced at $1 each.

So, total consumption is $1,200.

Tax brackets are as follows -

1. Consumption upto 2,000 apples is taxed at 10%.

2. Consumption higher than 2,000 apples is taxed at 25%.

Consumption of 1,200 apples applied to first tax bracket.

So, marginal tax rate in case of consumption of 1,200 apples is 10%.

Amount of tax = $1,200 * (10/100) = $120

Average tax = (Amount of tax/Taxable consumption) * 100 = ($120/$1,200) * 100 = 10%

So, average tax rate in case of consumption of 1,200 apples is 10%.

Case III

Consumption level = 2,500 apples

Apples are priced at $1 each.

So, total consumption is $2,500.

Tax brackets are as follows -

1. Consumption upto 2,000 apples is taxed at 10%.

2. Consumption higher than 2,000 apples is taxed at 25%.

Consumption of 2,500 apples applied to second tax bracket.

So, marginal tax rate in case of consumption of 2,500 apples is 25%.

Amount of tax = $2,000 * (10/100) + $500 * (25/100) = $325

Average tax = (Amount of tax/Taxable consumption) * 100 = ($325/$2,500) * 100 = 13%

So, average tax rate in case of consumption of 2,500 apples is 13%.

Follwing is the complete table -

Consumption Level

(Quantity of apples)

Plan A

Plan B

Marginal Tax Rate

(in percent)

Average Tax Rate

(in percent)

Marginal Tax Rate

(in percent)

Average Tax Rate

(in percent)

600

50

50

10

10

1,200

20

45

10

10

2,500

20

32

25

13

When average tax rate increases as level of income increases, tax system is said to be progressive.

When average tax rate decreases as level of income increases, tax system is said to be regressive.

When average tax rate remains same as level of income increases, tax system is said to be proportional.

As above table shows that,

In case of plan A, average tax rate is decreasing as level of income or consumption is increasing. So, plan A is a regressive tax system.

In case of plan B, average tax rate is increasing as level of income or consumption is increasing. So, plan B is a progressive tax system.

Consumption Level

(Quantity of apples)

Plan A

Plan B

Marginal Tax Rate

(in percent)

Average Tax Rate

(in percent)

Marginal Tax Rate

(in percent)

Average Tax Rate

(in percent)

600

50

50

10

10

1,200

20

45

10

10

2,500

20

32

25

13

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