Question

•	Consumption up to 1,000 apples is taxed at 50%.
•	Consumption higher than 1,000 apples is taxed at 20%.

•	Consumption up to 2,000 apples is taxed at 10%.
•	Consumption higher than 2,000 apples is taxed at 25%.

Use the Plan A and Plan B tax schemes to complete the following table by deriving the marginal and average tax rates under each tax plan at the consumption levels of 500 apples, 1,500 apples, and 2,500 apples, respectively.

Consumption Level	Plan A		Plan B
(Quantity of apples)	Marginal Tax Rate	Average Tax Rate	Marginal Tax Rate	Average Tax Rate
	(Percent)	(Percent)	(Percent)	(Percent)
500
1,500
2,500

Complete the following table by indicating whether each plan is a progressive tax system, a proportional tax system, or a regressive tax system.

	Progressive	Proportional	Regressive
Plan A
Plan B

6. Understanding marginal and average tax rates Consider the economy of Pomistan, where citizens consume only apples. Assume that apples are priced at $1 each. The government has devised the following tax plans:	Plan A	Plan B

Answer 1

Consumption Level	Plan A		Plan B
(Quantity of apples)	Marginal Tax Rate	Average Tax Rate	Marginal Tax Rate	Average Tax Rate
	(Percent)	(Percent)	(Percent)	(Percent)
500	50	50	10	10
1,500	20	40	10	10
2,500	20	32	25	13

Calculation:

Marginal tax rate is the tax rate at a particular income level. So, according to Plan A,
Marginal tax rate for 500 apples is 50%, for 1500 apples it is 20% and for 2500 apples it is 20%.
According to plan B, marginal tax rate for 500 apples is 10%, for 1500 apples it is 10% and for 2500 apples, it is 25%.

Average tax rate is the actual tax paid on the taxable income.
According to Plan A, actual tax paid on
500 apples = 500 * .5 = 250. So, average tax rate on 500 apples = (250 /500) * 100 = 50%
1500 apples = (1000*50%(+(500*20%) = 600. So average tax rate on 1500 apples = (600/1500)*100 = 40%
2500 apples = (1000*50%)+(1500*20%) = 800. So average tax on 2500 apples = (800 / 2500 )*100 = 32%
According to Plan B, actual tax paid on
500 apples = 500*10% = 50. So, average tax rate on 500 apples = (50/500)*100 = 10%
1500apples = 1500*10% = 150. So, average tax rate on 1500 apples = (150/1500)*100 = 10%
2500 apples = (2000*10% 500*25%) = 325. So, average tax rate on 2500 apples = (325/2500)*100 = 13%

	Progressive	Proportional	Regressive
Plan A	---	---	YES
Plan B	YES	---	---

reason: When increased income (or consumption) is taxed at a higher tax rate, it is called progressive tax rate. The idea is to tax the richer more than poorer. Plan B follows progressive tax.

On the other hand, when increased income is taxed at a lower rate, it is called regressive tax. The lower income group bear more tax burden than the higher income group. Plan A follows regressive tax pattern.