Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134079271
Author: CASE
Publisher: PEARSON
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Question
Chapter 19, Problem 1.1P
To determine
Calculate the average tax rate and identify the tax in nature.
Expert Solution & Answer
Explanation of Solution
The average tax rate can be calculated by using formula as follows:
Substitute the respective values in Equation (1) to calculate the average tax rate for the total income $35,000 as shown below:
The average tax rate for the total income $35,000 is 0.
Table-1 shows the values of the average tax rate for different income groups obtained by using Equation (1).
Table-1
| Total income |
Average tax rate |
|
$50,000 |
6.0% |
|
$65,000 |
9.2% |
|
$80,000 |
11.3% |
|
$ 100,000 |
13.0% |
|
$125,000 |
14.4% |
From table-1, it is clear that the tax is progressive in nature. There is no tax for the first $35,000. When the income rises, the tax rate also rises.
Figure-1 represents the graphical representation of the average tax rate of these different income levels.
In figure-1, the horizontal axis shows the income levels and the vertical axis shows the average tax rate. When the income rises the average tax rate also rises. Therefore the tax is progressive in nature.
Economics Concept Introduction
Progressive tax: The progressive tax refers to the higher income people paying a higher tax amount than the lower income people.
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Students have asked these similar questions
Consider an economy with the following income distribution: each person in the bottom quartile of the income distribution earns $15,000; each person in the middle two quartiles earns $40,000; and each person in the top quartile of the income distribution earns $100,000.a. What is the Gini coefficient associated with this income distribution?b. Suppose the bottom quartile pays no taxes, the middle two quartiles pay 10 percent of its income in taxes, and the top quartile pays 28 percent of its income in taxes. Two-thirds of all tax money is redistributed equally to all citizens in the form of military defense, government pensions (social security), roads/highways, and so on. The remaining one-third of tax money is distributed entirely to the poorest quartile. What is the Gini coefficient associated with this redistribution plan?Would you consider this tax and redistribution plan to be a particularly aggressive income redistribution policy?
Consider an economy with 4000 people and the following income distribution: each person in the bottom quartile of the income distribution earns $10 dollars per hour; each person in the 2nd quartiles earns $20 dollars per hour; each person in the 3rd quartiles earns $25 dollars per hour;and each person in the top quartile of the income distribution earns $45 dollars per hour. (2) Suppose the bottom quartile pays no taxes, the 2nd quartiles pay 10% its income in taxes, the 3rd pays 20% and the top quartile pays 40% of its income in taxes. 80% of all tax money is redistributed equally to all citizens in the form of military defense, government pensions (social security), roads/highways, etc. The remaining tax money is distributed entirely to the poorest quartile. What is the Gini coefficient associated with this redistribution plan?
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Answer the following questions in a paragraph.
1) Write the piecewise function of this country (make sure to use decimals instead of percent).
2) Determine how much tax is to be paid on an income of $20,000.
Chapter 19 Solutions
Principles of Economics (12th Edition)
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