Question

The nation of Fishkasar has a tax rate of 5% on the first 20,000 wallops (the national currency) fo taxable income, then 20% on the next 30,000 wallops, then 50% on all taxable income above the 50,000 wallops. Fishkasar provides a 5,000-walop exemption per family member.

c) Suppose that Fishkasar changed its tax code to a flat tax rate of 30% with an 10,000-wallop per family member exemption. Would this change in the tax system make the system more progressive, more regressive, or neither?

Answer 1

The marginal tax schedule is being flattened which should make the new tax system less progressive. Two families having the same taxable income will be subject to the same marginal tax rate irrespective of their income. However, since the per person exemption is being increased from 5,000 to 8,000 wallops, the average rates should be more progressive.

For example, take two families with incomes of 10,000 and 12,000 wallops (single-member families). The average tax paid under the old taxation system would have been 5%*(10,000-5,000) = 250. Tax rate = 250/10,000 = 2.50% Under the new system, its tax rate would be 0%. For the second family, under the old system, tax would have been 5%*(12,000-5,000) = 350 and average tax rate = 350/12,000 = 2.92%. Under the new system, it will pay 30%*(12,000-10,000) = 600; average tax rate = 600/12,000 = 5%. So, the new system is more progressive in this range of income.