Question

2. (15 points). Suppose the income tax in a certain nation is computed as a flat rate of 5 percent, but no tax is levied above $50,000 in taxable income. Taxable income is computed as the individual’s income minus $10,000; that is, everyone gets a $10,000 deduction. What are the marginal and average tax rates for each of the following three workers? (Evaluate the marginal tax rate at each person’s current income level). There is no refundable tax credit available.

a. A part‐time worker with annual income of $9,000.

b. A retain salesperson with annual income of $45,000.

c. An advertising executive with an annual income of $600,000.

Answer 1

A. a part time worker with annual income of $9,000

Marginal tax rate = Nil

Average tax rate = Nil

Regressive with respect to income

B. a retail sales person with an annual income of $45,000

Marginal tax rate = 5%

Average tax rate = [(45000 - 10000) * 5%] / 45000 = 3.89%

Proportional with respect to income

C. an advertising executive with annual income of 4,600,000

Marginal tax rate = 5%

Average tax rate = [(60000 - 10000) * 5%] / 4600000 = 0.05%

Prorressive with respect to income