Answer to Question #101905 in Microeconomics for Zane

Question

Describe the relationship between average tax rates and marginal tax rates for each of the three types of income tax. Which tax rate is generally relevant for someone who has to decide whether to take a job that is only slightly higher than their current job? Which tax rate is relevant for assessing the vertical justice of an income tax?

Answer 1

The relationship between average tax rate and marginal tax rate is

1. In proportional tax the tax is imposed so that the tax rate is fixed with no changes therefore the average tax rate is equal to the marginal tax rate.
2. In regressive tax the tax is imposed in such manner that the tax rate decreases as the amount subject to taxation increases at this case the average tax rate is higher than the marginal tax rate.
3. A progressive tax is the tax in which the tax rate increases as the taxable base amount increases therefore the average tax rate is lower than the marginal tax rate.

For a person opting the current job for a job paying higher can be under the marginal tax rate because it applies to the last unit of currency of the tax base and is often applied to one's obligation as income rises.

For the vertical justice its the proportional tax rate since its a tax imposed so that the rate is fixed.