Suppose there are two people in a society. The federal tax law states that the f

Question

Suppose there are two people in a society. The federal tax law states that the first $20,000 of income is taxed at 10% and income above that is taxed at 30%. The federal government allows taxes paid to local governments to be deducted. George earns a gross income of $40,000, and Jorge earns a gross income of $65,000. Out of his income, George pays $1,000 in local taxes; out of his income, Jorge pays $20,000 in local taxes.

a. Is George’s total (local + federal) tax bill greater than Jorge’s total tax bill? Yes or No. Show work.

b. Is the federal tax system progressive, proportional, or regressive? Explain.

Explanation / Answer

a)

The government finances it’s spending from the revenue it collects as tax on income, sales, corporate income and other various sources of income. There are three types of taxes:

The progressive tax rate is one that rises as the income of the person increases. The regressive tax rate is one that falls as the income of the person increases. The proportional tax or flat tax is one that charges same tax rate to all people irrespective of their income.

The tax of two consumer is given below

GEORGE:

JORGE:

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b)

The Federal tax system is progressive one, because as income rises from $20000, the tax rate rises from 10% to 30%.

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