Each of the following tax proposals has income as the tax base. In each case, calculate the marginal tax rate for each level of income. Then calculate the percentage of income paid in taxes for an individual with a pre-tax income of $5,000 and for an individual with a pre-tax income of $40,000. Classify the tax as being proportional, progressive, or regressive. a. All income is taxed at 20%.
b. All income up to $10,000 is tax-free. All income above $10,000 is taxed at a constant rate of 20%.
c. All income between $0 and $10,000 is taxed at 10%. All income between $10,000 and $20,000 is taxed at 20%. All income higher than $20,000 is taxed at 30%.
d. Each individual who earns more than $10,000 pays a lump-sum tax of $10,000. If the individual's income is less than $10,000, that individual pays in taxes exactly what his or her income is.
e. Of the four tax policies, which is likely to cause the worst incentive problems? Explain.