Question

Question 3 Assume the City of Norfolk used the following tax schedule for individuals: Income Tax 0-50,000 11% 50,001-100,000 8% 100,001 + 5% a. Briefly define horizontal and vertical tax equity (no more than two sentences per term). b. Mr. Monarch earned $150,000 this year. Compute his (1) Norfolk city tax, (2) average tax rate, and (3) marginal tax rate. c. Is the city of Norfolk's individual rate schedule regressive, proportional or progressive and what is the reasoning for your answer?

Answer 1

Given the tax rates of Norfolk are as follows

0 - 50,000 11%

50,001 - 100,000. 8%

100,001. 5%

a) Hrizontal and Vertical Tax Equity

Horizontal Tax Equity: Horizontal Tax Equiity is the principle in which the tax payers who have teh same income should pay the same amount of taxes. It should apply to the individuals who ha sequal income regardless of the tax system in the place.

Vertical Tax Equity: This is the principle in which the tax obligations varies in proportion to the income. The taxpayers who has more income pays more taxes and who has less income pays less when compared to who has more.

b) Calculation of Norfolk City Tax

Given Mr. Monarch earned $150,000 this Year

Norfolf City Tax = ($50,000 * 11%) + ($50,000 * 8%) + ($50,000 * 5%)

= $5,500 + $4,000 + $2,500

Norfolk City Tax = $12,000

Calcuation of Average Tax Rate

Average Tax Rate = Tax Amount / Total Income

= $12,000 / $150,000

Average Tax Rate =  8%  

Marginal Tax Rate: It is the rate imposed on the last dollar of the income.

The tax rate im[ose on the last dollar of the income for Mr.Monarch is 5%

Hence Marginal Tax Rate is 5%

c) Regressive, Proportional and Progressive Tax:

Regressiev Tax: A tax that takes larger percentage of taxes from ower income groups than the higher income groups.

Proportionate Tax: The taxes which are taken the same percentage of incoem from all the income groups proporationately is called Proportionate Tax.

Progressive Tax: It is the method in which the larger taxes are taken from the higher income groups than the lower income groups.

So, the city of Norfolk Tax schedule is Regressive as the rates are decreasing with increase in the income.