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

A. I earn $600 and pay $60 in taxes; you earn $1,200 and pay $100 in taxes.
B. I earn $600 and pay $60 in taxes; you earn $1,200 and pay $200 in taxes.
C. I earn $600 and pay $60 in taxes; you earn $1,200 and pay $60 in taxes.
D. I earn $600 and pay $60 in taxes; you earn $1,200 and pay $120 in taxes.

User Keith Rome
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1 Answer

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Final answer:

The best example of a progressive tax from the options provided is B: I earn $600 and pay $60 in taxes; you earn $1,200 and pay $200 in taxes, because as the income doubles, the tax paid triples, which fits the progressive tax system where higher earners pay a higher percentage of their income in taxes.

Step-by-step explanation:

The progressive taxation system is one in which the tax rate increases as the taxable amount increases. This means that higher earners pay a larger percentage of their income in taxes compared to lower earners. To determine which scenario best illustrates a progressive tax, we must calculate the average tax rate, which is the total taxes paid divided by total income.

  • For option A, the average tax rate for someone earning $600 is 10% ($60/$600), and for someone earning $1,200, it's 8.33% ($100/$1,200), which doesn't illustrate progression.
  • In option B, the person earning $600 also has an average tax rate of 10%, but the person earning $1,200 has an average tax rate of 16.67% ($200/$1,200), which does show tax progression appropriate for a progressive tax system.
  • Option C reflects a regressive tax situation where both parties pay the same tax regardless of income disparity.
  • Option D has a flat tax rate of 10% for both levels of income, which isn't progressive.

Thus, the answer is B: I earn $600 and pay $60 in taxes; you earn $1,200 and pay $200 in taxes, as this best represents the concept of progressive taxes.

User Tony Adams
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