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: \lfloor 020.6 a. Progressive. b. Regressive. c. Proportional.

Short answer

b. Regressive.

Step-by-step solution

Understanding Progressive Taxation

In a progressive tax system, the tax rate increases as the income increases. This means that high-income earners pay a larger percentage of their income in taxes than low-income earners.

Calculating Tax Rates

Calculate the percentage of income paid as taxes by dividing the taxes paid by the income. \(\text{Tax rate for 100,000 kroner} = \frac{40,000}{100,000} = 40\%\)\(\text{Tax rate for 200,000 kroner} = \frac{70,000}{200,000} = 35\%\)\(\text{Tax rate for 300,000 kroner} = \frac{90,000}{300,000} = 30\%\)

Understanding Regressive Taxation

In a regressive tax system, the tax rate decreases as the income increases. This means that high-income earners pay a smaller percentage of their income in taxes than low-income earners.

Comparing Tax Rates

By comparing the calculated tax rates, we observe that the tax rate decreases as income increases: from 40% at 100,000 kroner to 35% at 200,000 kroner, and to 30% at 300,000 kroner. This pattern aligns with a regressive tax system.

Identifying Tax System

Based on the pattern where higher incomes pay a lower percentage of their income as taxes, Upstandia's tax system is identified as regressive.

Key concepts

Progressive Taxation

Progressive taxation is designed so that the tax rate increases with a person's income. This means people who earn more pay a higher percentage of their income in taxes compared to those who earn less. Progressive taxes are usually seen as a fair way to levy taxes because they help reduce income inequality by imposing a higher tax burden on those who have a greater ability to pay.

Examples of progressive taxes include income taxes where tax brackets increase with income. This system aims to distribute wealth more evenly, thus funding public services like education and healthcare. Progressive tax systems are often seen as beneficial for creating a balanced economy.

Regressive Taxation

Regressive taxation, on the other hand, imposes a lesser percentage of income in taxes on higher earners than on lower earners. In a regressive tax system, as a person earns more, their effective tax rate decreases. This can lead to greater income inequality because lower earners pay a relatively larger proportion of their income in taxes compared to higher earners.

One common example of a regressive tax is a sales tax on goods, as all consumers pay the same rate regardless of income, disproportionately affecting those with lower incomes. Understanding regressive taxation helps to highlight debates on equity and fairness in tax policies.

Income Tax Rates

Income tax rates are percentages of a person's income that are paid to the government as taxes. These rates can vary significantly depending on the structure of the tax system in place. Different countries adopt different approaches, with some implementing flat rates (proportional), while others use varying rates (progressive or regressive).

In Upstandia’s context, income tax rates are shown to decrease as income increases, illustrating a regressive tax system. Calculating income tax rates involves dividing the amount of taxes paid by the total income earned. This provides a percentage that indicates how much of one's income goes to the government.

Evaluating different income tax rates helps individuals plan financially and understand their financial obligations.

Tax Calculation Steps

To understand any tax structure, it’s crucial to know how to calculate tax rates. Here’s a simplified approach:

• First, identify the total income earned by an individual or household.
• Determine the total tax paid from that income.
• Calculate the tax rate by dividing the tax paid by the total income and then multiplying by 100 to get a percentage.

In the exercise example, the tax for each income bracket was calculated, leading to a better understanding of the tax system in Upstandia.

Following these steps helps individuals realize the percentage of their income dedicated to taxes and assess how fair or equitable a tax system might be. Such understanding is essential for participating in informed discussions on taxation policies.