Chapter 1. Chapter 7

Step 1

Work It Out

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You must read each slide, and complete any questions on the slide, in sequence.

Question

You work for the Council of Economic Advisers, providing economic advice to the White House. The president wants to overhaul the income tax system and asks your advice. Suppose that the current income tax system consists of a proportional tax of 10% on all income and that there is one person in the country who earns $110 million; everyone else earns less than $100 million. The president proposes a tax cut targeted at the very rich so that the new tax system would consist of a proportional tax of 10% on all income up to $100 million and a marginal tax rate of 0% (no tax) on income above $100 million. You are asked to evaluate this tax proposal.

For incomes of $100 million or less, is this tax system progressive, regressive, or proportional?

This tax system is my2DRQzeqOk6BvACIyv6L8Bml7k7cTt+YCOKMw==

This tax system is proportional up to an income of $100 million. Everyone making less than $100 million will pay the same percent of income, 10%. For further review see section, “Tax Bases and Tax Structure.

Question

For incomes of more than $100 million? Is this tax system progressive, regressive, or proportional?

This tax system is hSYv4/ZB7vAUiO06D3qipgDoX/FvG9vJBWh7+Q==

This tax system is regressive for incomes higher than $100 million. Above $100 million, the tax is regressive, since higher-income taxpayers pay a smaller percentage of their income in taxes. For instance, the individual with income of $110 million pays $100 million × 10% = $10 million in taxes, which is $10 million/$110 million × 100 = 9% of his or her income in taxes. But an individual with an even higher income, say $200 million, would pay $100 million × 10% = $10 million in taxes, which is $10 million/$200 million × 100 = 5% of his or her income in taxes.For further review see section, “Tax Bases and Tax Structure.

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Step 2

Question

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