Question

Jake had taxable income of $40,000 and paid $1,500 of income tax; Jill had taxable income of $15,000 and paid $4,000 of income tax. The tax rate structure they are subject to is:


Multiple Choice

Recessive.


Regressive.


Progressive.


Proportional.

Answer 1

To determine the nature of the tax rate structure based on the provided information, we can analyze the effective tax rates for both Jake and Jill.

1. **Jake's Tax Information:**
- Taxable income: $40,000
- Income tax paid: $1,500
- Effective tax rate: \( \frac{1,500}{40,000} = 0.0375 \) or 3.75%

2. **Jill's Tax Information:**
- Taxable income: $15,000
- Income tax paid: $4,000
- Effective tax rate: \( \frac{4,000}{15,000} = 0.2667 \) or 26.67%

Now, let's analyze the types of tax structures:

- **Regressive Tax:** A tax rate that decreases as income increases. (Lower income brackets pay a higher percentage of their income in taxes.)
- **Progressive Tax:** A tax rate that increases as income increases. (Higher income brackets pay a higher percentage of their income in taxes.)
- **Proportional Tax:** A tax that is the same percentage for all income levels. (Everyone pays the same rate regardless of income.)
- **Recessive Tax:** This term is not commonly used in taxation and might be confused with "regressive."

Since Jill has a significantly higher effective tax rate than Jake, it indicates that the tax burden is heavier on those with lower incomes. Therefore, the tax structure is **regressive**.

The correct answer is: **Regressive.**