Question

1,When is a tax system said to be progressive? Relate the concept of progressivity to "fairness''.

2.Assume that there are three goods: two consumption goods and leisure. Does a sales tax at a rate of 25 percent have the same excess burden as a wage tax of 25 percent? Explain.

Answer 1

Answer 1 - The tax system is called the progressive tax system if more rate of tax is charged as the level of income rises. This means that the people earning more have to have a higher tax and the tax rate varies directly with the level of income . Yes , this system relates to fairness , because people with more income pay more tax and vice a versa and hence everyone is treated equally. There are no disparities in taxation system. It would have been unfair if person with lesser income has to pay more tax which does not happen here.