Scenario: There are 4 households in a locality. The annual income of the first household is $20,000, the annual income of the second household is $47,000, the annual income of the third household is $50,000, and the annual income of the fourth household is $71,000. Refer to the scenario above. Which family pays the highest percentage of its income as tax if income taxes collected by the local government are regressive in nature? A) The first household. B) The second household. C) The third household. D) The fourth household.

A) The first household.

Explanation:

The tax of the first household = $20,000 x 20% = $4000

The tax of the second household = $47,000 x 17.5% = $8225

The tax of the third household = $50,000 x 13% = $6500

The tax of the first household = $71,000 x 10% = $7100

A regressive tax is a tax applied uniformly, taking a larger percentage of income from low-income earners than from high-income earners. It is in opposition to a progressive tax, which takes a larger percentage from high-income earners.

Hence Household A which earns the lowest income pays the highest tax

A) The first household.

Explanation:

A regressive tax is basically a tax whose rate increases as your income decreases. Generally you do not need to increase the marginal tax rate of lower income levels, all you need to do is have a flat tax that taxes everyone with the same amount. E. g. everyone pays $2,000 as income taxes. $2,000 per person represents 10% of the first household's income, but it only represents 2.7% of the fourth household's income.

On the other hand, progressive taxes increase as the income level of the taxpayers increases.