Question

If the marginal tax rate is less than the average tax rate, the tax system is?

a. proportional

b. flat

c. regressive

d. progressive

Answer 1

Suppose a person pay $20 on first $100 income and then on the more $100 it has to pay $30 as a tax. Then Average tax rate= 50/200*100= 25% and marginal tax rate is the rate of tax paid on last $ income which is 30/100 * 100= 30%.

For proportional tax rate person need to pay same proportionate amount on each dollar that is tax rate is 20% irrespective of level of income. So marginal tax rate= 20%=average tax rate.

Regressive tax rate refers to rate of tax decreases with rise in income. For first $100 income person pay $20 then for $100 it will pay $10. So average tax rate= 30/200 * 100= 15% and marginal tax rate= 10/100*100= 10%

Progressive tax rate refers to rate of tax increases with rise in income. For first $100 income person pay $20 then for $100 it will pay $30. So average tax rate= 50/200 * 100= 25% and marginal tax rate= 30/100*100= 30%

So If the marginal tax rate is less than the average tax rate, the tax system is regressive.