Question

Which of the following examples best illustrates a progressive tax? (Hint: Calculate the average tax rates)

Group of Answer Choices:
i. I earn $600 and pay $60 in taxes; you earn $1,200 and pay $100 in taxes.
ii. I earn $600 and pay $60 in taxes; you earn $1,200 and pay $200 in taxes.
iii. I earn $600 and pay $60 in taxes; you earn $1,200 and pay $60 in taxes.
iv. I earn $600 and pay $60 in taxes; you earn $1,200 and pay $120 in taxes.

Answer 1

Option ii, where a person earning $600 pays $60 in taxes (10% rate) and another earning $1,200 pays $200 in taxes (16.67% rate), best illustrates a progressive tax, as the higher-income individual pays a higher percentage of their income in taxes.

Step-by-step explanation:

A progressive tax is characterized by higher earners paying a greater percentage of their income in taxes compared to those with lower incomes. Assessing the given options and calculating the average tax rate (taxes paid divided by income) helps us identify the progressive tax scenario.

• Option i: $60/$600 = 10%, $100/$1,200 = 8.33% (Not progressive)
• Option ii: $60/$600 = 10%, $200/$1,200 = 16.67% (Progressive, higher income pays a higher rate)
• Option iii: $60/$600 = 10%, $60/$1,200 = 5% (Not progressive, higher income pays a lower rate)
• Option iv: $60/$600 = 10%, $120/$1,200 = 10% (Not progressive, rate is the same)

Therefore, the answer that best illustrates a progressive tax is option ii, where the individual with the higher income pays a higher percentage of that income in taxes.