Question

A hypothetical society has three income earners, and all three must pay income taxes. The taxable income of Smith is $35,000, the taxable income of Jones is $100,000, and the taxable income of Brown is $200,000.

Complete the following table by computing tax revenue under a proportional income tax when the tax rate is 10% and 15%.

Tax	Tax Revenue
10%
15%

Suppose a progressive tax system is implemented with a rate of 5% on income of $0–$40,000, a rate of 8% on income from $40,001 to $100,000, and a rate of 15% on all income over $100,000.

Under a progressive income tax system, a person’s tax rate _______ as his or her taxable income rises. In this case, tax revenue is _____ under the proportional income tax than it is under the newly implemented progressive income tax system.

Answer 1

Under progressive income tax system, a person's tax rate increases as his or her taxable income rises. In this case, tax revenue is higher under the proportional income tax than it is under the newly iplemented progressive income tax system. Under proprtional tax system, the total tax revnue is $ 33,500 (when tax rate is 10%) and $ 50,250 (when tax rate is 15%). Under progressive tax system , the tax reveue is $ 30,350.  

Solutions are as below: