ECON 201 Lecture Notes - Lecture 4: Tax Rate, Regressive Tax, Deadweight Loss

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7 Dec 2016
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Legislators also prefer the burden of taxation to fall most on people who will feel it least. This objective can conflict with minimizing deadweight loss: goods with inelastic demand are usually necessities, which lower income families spend more of their income on. In a flat tax system, everyone pays the same fraction of their income in taxes: everyone pays the same fraction of income in taxes. For a progressive tax system, the average tax rate is higher for higher income people: the federal income tax is progressive. For a regressive tax system, the average tax rate is lower for higher income people: the payroll tax and sales taxes are regressive. The average tax rate is the fraction of your income that you pay in taxes: taxes divided by income. The marginal tax rate is the fraction of the last dollar you earned that you paid in taxes: change in taxes divided by change in income.

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