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Chapter 17: Problem 4

Suppose that gifts were taxed at a rate of \(10 \%\) for amounts up to 100,000 dollar and \(20 \%\) for anything over that amount. Would this tax be regressive or progressive?

Short Answer

Expert verified
The given tax structure on gifts is progressive because the effective tax rate increases as the gift amount increases. For a gift amount of 50,000 dollars, the effective tax rate is 10%. For a gift amount of 100,000 dollars, the effective tax rate remains at 10%. However, when the gift amount increases to 150,000 dollars, the effective tax rate rises to 13.33%.

Step by step solution

01

Calculate the tax for different gift amounts

Let's consider different gift amounts and calculate the tax for each scenario using the given tax rates. Scenario 1: Gift amount is 50,000 dollars Tax rate: 10% Tax: \(0.1 * 50,000 = 5,000\) dollars Scenario 2: Gift amount is 100,000 dollars Tax rate: 10% Tax: \(0.1 * 100,000 = 10,000\) dollars Scenario 3: Gift amount is 150,000 dollars Tax rate: 10% for the first 100,000 dollars and 20% for the remaining 50,000 dollars Tax: \((0.1 * 100,000) + (0.2 * 50,000) = 10,000 + 10,000 = 20,000\) dollars
02

Calculate the effective tax rate for each scenario

We will now calculate the effective tax rate for each scenario by dividing the tax by the total gift amount. Scenario 1: Effective tax rate: \(5,000 / 50,000 = 0.1 = 10\%\) Scenario 2: Effective tax rate: \(10,000 / 100,000 = 0.1 = 10\%\) Scenario 3: Effective tax rate: \(20,000 / 150,000 = 0.1333 = 13.33\%\)
03

Analyze the effective tax rates and determine if the tax is regressive or progressive

Let's analyze the effective tax rates for each scenario: - As the gift amount increases from 50,000 dollars to 100,000 dollars, the effective tax rate remains the same at 10%. - As the gift amount increases from 100,000 dollars to 150,000 dollars, the effective tax rate increases to 13.33%. Because the effective tax rate increases as the gift amount increases, we can conclude that this tax structure is progressive.

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Most popular questions from this chapter

Have the spending and taxes of the U.S. federal government generally had an upward or a downward trend in the last few decades?

The social security tax is \(6.2 \%\) on employees' income earned below 113,000 dollar. Is this tax progressive, regressive or proportional?

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