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Chapter 11: Problem 5

Is it true that, under a proportional income tax structure, a person who earns a high income will pay more in taxes than a person who earns a low income? Explain your answer.

Short Answer

Expert verified
Yes, it is true that under a proportional income tax structure, a high-income individual will pay more tax in absolute terms than a low-income individual. This is because the tax is a certain percentage of their income, so as their income increases, the absolute amount they pay in taxes also increases, even though the tax rate remains constant.

Step by step solution

01

Understanding Proportional Tax

In a proportional tax system, everyone pays the same percentage of their income as tax. Imagine the tax rate is 10%. This means, for every dollar earned, 10% or 10 cents is paid as tax.
02

Apply Proportional Tax to Different Incomes

Suppose there are two individuals: one with a high income and one with a low income. If the high-income individual earns $100,000 a year, then at a 10% tax rate, they'll pay $10,000 (10% of $100,000) in taxes. But, if the low-income individual earns $30,000 per year, then they will pay $3,000 (10% of $30,000) in taxes.
03

Conclusion

Even though the tax rate is the same for both individuals, the absolute amount of tax paid differs. The individual with the higher income pays more in absolute terms. It's important to note that though they pay more in dollar terms, the impact on their income relative to a low-income individual is the same since the tax rate is constant at 10%.

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