Question

The nation of Upstandia uses kroner for money and its tax code is such that a person making 100,000 kroner per year pays 40,000 kroner per year in income taxes; a person making 200,000 kroner per year pays 70,000 kroner per year in income taxes; and a person making 300,000 kroner per year pays 90,000 kroner per year in income taxes. Upstandia's income tax system is: a. Progressive. b. Regressive. c. Proportional.

Short answer

Upstandia's tax system is regressive.

Step-by-step solution

Understanding Progressive Tax System

A progressive tax system is one where the percentage of tax paid increases as the income level increases. In other words, higher-income individuals pay a higher proportion of their income in taxes compared to lower-income earners.

Understanding Regressive Tax System

A regressive tax system is the opposite of a progressive tax. In this system, lower-income individuals pay a higher percentage of their income in taxes compared to higher-income earners. Thus, those with lower income bear a heavier tax burden relative to their income.

Understanding Proportional Tax System

A proportional tax system, often called a flat tax, is where everyone pays the same percentage of their income regardless of how much they earn. This means the tax rate is fixed and does not change with the income level.

Calculate Tax Rates for Different Incomes

To determine Upstandia's tax system, calculate the tax rate for each income level:- For 100,000 kroner: Tax rate = \(\frac{40,000}{100,000} \times 100\% = 40\%\).- For 200,000 kroner: Tax rate = \(\frac{70,000}{200,000} \times 100\% = 35\%\).- For 300,000 kroner: Tax rate = \(\frac{90,000}{300,000} \times 100\% = 30\%\).

Analyzing the Tax System

Analyze the calculated tax rates: - As income increases from 100,000 to 300,000 kroner, the tax rate decreases from 40% to 30%. - This indicates that individuals with higher incomes pay a smaller proportion of their income in taxes compared to individuals with lower incomes.

Conclusion on Tax System Type

Based on the analysis, Upstandia's tax system is regressive because the tax rate decreases as the income increases, placing a larger relative burden on lower-income earners.

Key concepts

Progressive Tax System

A progressive tax system is structured to ensure that those who earn more, pay a larger percentage of their income in taxes compared to those who earn less. This method is designed to reduce income inequality by charging higher-income individuals a higher effective tax rate.

**How it Works**
A common way of implementing a progressive tax system is through tax brackets. Each bracket corresponds to a particular income range with an associated tax rate. Individuals pay the specified percentage in taxes on income that falls within each range.

**Example**
Imagine a simple tax bracket system:
- Income up to $50,000 is taxed at 10%
- Income from $50,001 to $100,000 is taxed at 20%
- Income above $100,000 is taxed at 30%

In this example, someone earning $120,000 will pay 10% on the first $50,000, 20% on the next $50,000, and 30% on the remaining $20,000. This creates an effective overall tax rate that increases with income.

**Advantages**
- Promotes economic equality
- Can fund essential public services like education and healthcare better

**Challenges**
- High earners may seek loopholes to decrease their tax burden
- Can be complex to administer and understand

Regressive Tax System

A regressive tax system, in stark contrast to a progressive system, results in lower-income earners paying a higher percentage of their income in taxes. Unfortunately, this type of system can exacerbate income inequality, as it places a more substantial relative financial burden on those with lower incomes.

**Characteristics**
In a regressive tax system, the tax rate decreases as the income of the taxpayer increases. This means that, proportionally, wealthier individuals contribute less of their income compared to those earning less.

**Examples**
- Sales Tax: Everyone pays the same rate on purchases, a greater burden on lower earners who spend a higher percentage of their income.
- Flat Fees: Like a parking fee that's the same for everyone regardless of earnings.

**Impacts**
- Low-income households can struggle with basic expenses when more of their income is taxed.
- These systems do not address income disparity and may even widen economic gaps.

**Solutions**
To mitigate regression, governments might offer tax credits or exemptions on necessities, easing the burden on those least able to afford it.

Proportional Tax System

In a proportional tax system, often referred to as a flat tax, every individual pays the same percentage of their income in taxes, irrespective of how much they earn. This method is marked by its simplicity and predictability, attributes that make it popular in certain advocacy circles.

**Core Features**
- The tax rate remains constant across all income levels.
- It simplifies tax calculations and compliance.

**Illustration**
Suppose a proportional tax rate is set at 15%.
- A person earning $50,000 pays 15% in taxes, amounting to $7,500.
- A person earning $200,000 pays the same 15%, resulting in a $30,000 tax bill.

**Pros and Cons**
- **Pros:**

• Simplifies the tax system; less paperwork and administration required.
• Encourages transparency, as everyone understands the same rate applies.

- **Cons:**

• May not address income inequality, as rich and poor pay the same proportion.
• Lacks progressiveness, potentially burdening those with less income.

Proportional tax systems are often debated for their fairness and effectiveness, especially in societies seeking to balance equality with economic growth.