Question

Refer to the following table for Waxwania:

What is the marginal tax rate in Waxwania? The average tax rate? Which of the following describes the tax system: proportional, progressive, or regressive?

Short answer

The marginal tax rate is 20%, and the average tax rate is also 20%. The tax system is proportional.

Step-by-step solution

Marginal tax rate in Waxwania

The marginal tax rate is the rate of change in tax at each level of GDP.

$$\begin{gathered} MarginalTaxRate=\frac{△TaxRevenue}{△RealGDP}\times 100 \\ =\frac{20}{100}\times 100=20\% \end{gathered}$$

The marginal tax rate is 20%.

Average tax rate in Waxwania and tax rate system

The average tax rate is calculated as follows:

$$\begin{gathered} AverageTaxRate=\frac{TaxRevenue}{RealGDP}\times 100 \\ =\frac{700}{3500}\times 100 \\ =0.2\times 100=20\% \end{gathered}$$

The average tax rate is 20%.

Since the marginal tax rate and average tax rate coincide, this implies that the tax rate is constant at each level of the GDP. Therefore, it demonstrates a proportional tax system.