Chapter 6, Problem 6.1SC

To determine

The types of tax rates and tax systems

Conceptual Introduction:

Types of tax systems-There rea three types of tax systems.

(1) Proportional- It is the system where regardless of the income all taxpayers pay the same percentage of their incomes as taxes. Here the marginal tax rate equals the average tax rate.

(2) Progressive- In this system as the income increases the rate of tax increases. The high-income individuals pay a higher percentage of income taxes while low-income people pay lower. Here the marginal rate of tax is higher than the average tax rate. This system reduces the income inequality in the market.

(3) Regressive- In this system as the income rises the rate of tax falls. The high-income group people pay less percentage of income as tax than the low-income people. Here the marginal tax rate is less than the average tax rate.

The three systems are illustrated in the graph below:

Average Tax Rate- It is the total amount of tax over the total income.

Marginal Tax Rate- It is the tax rate on each additional dollar of income. In other words, it is the tax levied on the additional income earned.