Chapter 7, Problem 12P

To determine

1. Whether the tax Proposal A and the tax Proposal B regressive, progressive or proportional
2. Whether the tax proposal A and the tax Proposal B based on the ability to pay principle or benefits received principle
3. The tax that is better in terms of efficiency

Concept Introduction:

Ability to Pay Principle of Taxation:

According to this principle or approach, an individual is taxed as per her ability to pay. Higher the income, higher is the ability to pay and thus higher is the tax rate. The idea behind this principle is that in the society those who are able to pay should contribute to the treasury of the government at the cost of those who are not able to pay.

Benefits Principle of Taxation:

This principle says that an individual should pay taxes only on the benefits she receive. One needs to pay toll tax only when he/she uses the road.

Progressive Tax:

As income increases tax rate also increases.

Proportional Tax:

As income increase tax rate remains the same.

Regressive Tax:

As income increases tax rate decreases.