Textbook Problem

A hypothetical society has three income earners, and all three must pay income taxes. The taxable income of Smith is $40,000, the taxable income of Jones is $100,000, and the taxable income of Brown is $200,000.

1. a. How much tax revenue is raised under a proportional income tax when the tax rate is 10 percent? How much is raised if the tax rate is 15 percent?
2. b. A progressive tax system is installed with a rate of 5 percent on income of $0–$40,000, a rate of 8 percent on income from $40,001 to $100,000, and a rate of 15 percent on all income over $100,000. Will this system raise more or less tax revenue than a proportional tax rate of 10 percent? Explain your answer.