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Chapter 18: Problem 2

What is the difference between a progressive tax and a regressive tax? Give an example of each.

Short Answer

Expert verified
A progressive tax is one where the tax rate increases as the taxable amount increases, with higher earners paying a larger proportion of their income in taxes. An example is income tax. A regressive tax is one that takes a larger proportion of income from low-income earners than from high income earners with everyone paying the same tax rate. An example would be sales tax.

Step by step solution

01

Define Progressive Tax

A progressive tax is a tax in which the tax rate increases as the taxable amount increases. It is structured so that people or corporations with higher incomes pay a larger proportion of their income in taxes compared to those with lower income.
02

Example of Progressive Tax

An example of a progressive tax is income tax. Here, a person who earns $20,000 a year might pay 10% of their income in tax, whereas a person earning $200,000 a year might pay 35%.
03

Define Regressive Tax

A regressive tax is a tax that takes a larger proportion of income from low-income earners than from high-income earners. It is the opposite of a progressive tax.
04

Example of Regressive Tax

An example of a regressive tax is sales tax. In this case, everyone pays the same percentage regardless of their income. This means that someone earning $20,000 and someone earning $200,000 would both pay the same rate, say 7% on a $10,000 purchase. As a percentage of their income, the lower earner is paying a higher portion than the higher earner.

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Most popular questions from this chapter

The federal government imposes a tax on sales of cigarettes. The federal Centers for Disease Control and Prevention compiled the data shown in the following table. \begin{tabular}{l|l} \multicolumn{2}{c} { Percentage of Adults Who Are Current Cigarette Smokers, 2015 } \\ \hline At or above the poverty level & \(15.5 \%\) \\ \hline Below the poverty level & \(29.5 \%\) \\ \hline \end{tabular} Based on these data, is the federal cigarette tax progressive or regressive? Be sure to define progressive tax and regressive tax in your answer.

(Related to the Chapter Opener on page 600) In a column in the Washington Post, Robert J. Samuelson wrote, "As for what's caused greater inequality, we're also in the dark. The Reagan and Bush tax cuts are weak explanations, because gains have occurred in pretax incomes.... Up to a point, inequality is inevitable and desirable." a. What are pretax incomes? b. Do you agree with Samuelson's argument that income inequality may be inevitable and desirable? Briefly explain.

(Related to Solved Problem 18.3 on page 616 ) Explain whether you agree with the following statement: "For a given demand curve, the excess burden of a tax will be greater when supply is less price elastic than when it is more price elastic." Illustrate your answer with a demand and supply graph.

(Related to the Apply the Concept on page 626) In an article in the Wall Street Journal, Edward Lazear of Stanford University was quoted as saying, "There is some good news.... Most of the inequality reflects an increase in returns to 'investing in skills." Why would it be good news if it were true that most of the income inequality in the United States reflected an increase in returns to investing in skills?

What is the difference between a marginal tax rate and an average tax rate? Which is more important in determining the effect of a change in taxes on economic behavior?
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