If income is taxed at a rate of 20% for amounts up to $100,000 and 30% for anything over that amount. What type of tax is it?
If income is taxed at a rate of 20% for amounts up to $100,000 and 30% for anything over that amount. What type of tax is it?
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8. Understanding marginal and average tax rates
Consider the economy of Citronia, where citizens consume only oranges. Assume that oranges cost $1 each, and each person can buy at most 5,000 oranges. The government has devised the following tax plans:
| Plan A | Plan B |
|---|---|
| Consumption of up to 1,000 oranges is taxed at 20%. | Consumption of up to 2,000 oranges is taxed at 30%. |
| Consumption higher than 1,000 oranges is taxed at 80%. | Consumption higher than 2,000 oranges is taxed at 10%. |
Derive the marginal and average tax rates under each tax plan at the consumption levels of 500 oranges, 1,500 oranges, and 2,500 oranges, respectively. Fill in the following table with your results.
| Plan A | Plan B | |||
|---|---|---|---|---|
| Consumption Level | Marginal Tax Rate | Average Tax Rate | Marginal Tax Rate | Average Tax Rate |
| 500 oranges | ||||
| 1,500 oranges | ||||
| 2,500 oranges |
Understanding marginal and average tax rates
Consider the economy of Pomistan, where citizens consume only apples. Assume that apples cost $1 each, and each person can buy at most 5,000 apples. The government has devised the following tax plans:
|
Plan A |
Plan B |
|---|---|
| Consumption up to 1,000 apples is taxed at 10%. | Consumption up to 2,000 apples is taxed at 20%. |
| Consumption higher than 1,000 apples is taxed at 40%. | Consumption higher than 2,000 apples is taxed at 10%. |
Derive 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. Fill in the following table with your results.
|
Plan A |
Plan B |
|||
|---|---|---|---|---|
| Consumption Level | Marginal Tax Rate | Average Tax Rate | Marginal Tax Rate | Average Tax Rate |
| 500 apples | (10%,20%/28%/40%) | (10%,20%/28%/40%) | (10%/16%/18%/20%) | (10%/16%/18%/20%) |
| 1,500 apples | (10%,20%/28%/40%) | (10%,20%/28%/40%) | (10%/16%/18%/20%) | (10%/16%/18%/20%) |
| 2,500 apples | (10%,20%/28%/40%) | (10%,20%/28%/40%) | (10%/16%/18%/20%) | (10%/16%/18%/20%) |
