One state adds a 7 percent sales tax to the price of most products purchased within its jurisdiction. This tax, therefore, if viewed as tax on income, has the reverse effect of the federal income tax: the lower the income, the higher the annual percentage rate at which the income is taxed.
The conclusion above would be properly drawn if which of the following were assumed as a premise?
(A) The amount of money citizens spend on products subject to the state tax tends to be equal across income levels.
(B) The federal income tax favors citizens with high incomes, whereas the state sales tax favors citizens with low incomes.
(C) Citizens with low annual incomes can afford to pay a relatively higher percentage of their incomes in state sales tax, since their federal income tax is relatively low.
(D) The lower a state’s sales tax, the more it will tend to redistribute income from the more affluent citizens to the rest of society.
(E) Citizens who fail to earn federally taxable income are also exempt from the state sales tax.
Provide detailed explanations to your answer.
On a purchase of $100 product, Larry, whose income is $1000, spends $7 because of the interest on the product.
On the purchase of same $100 product, Alisa, whose income is $100000, spends $7 because of the interest on the product.
$7 of 1000 IS MUCH MUCH higher than $7 of 100000. Thus, Larry is paying a greater percentage of his income for this tax than Alisa is. This entire scenario is exactly opposite to the federal tax paradigm, where a higher earner spends a greater percentage against his/her tax.
What did we assume here; we assumed that both Alisa and Larry paid only "$7" for the product. What if the price of the taxable products vary. We know the tax doesn't vary but the product price itself may vary.
A product that Larry purchase is priced at $100. Larry pays $7 in tax. $7 of 1000 is 0.007
And, the same product if bought by Alisa can be priced at $100000, as it is purchased by a high earner. She pays 7000 in tax. 0.07 of her income.
Who paid more tax now; Alisa of course.
Thus, if we assume that the prices of the taxable products are constant across all income levels, the conclusion can properly be drawn.
Conclusion is - lower the income, higher the federal tax, opposite of that is the outcome of the state tax, so higher the income, higher the person pays in sales tax
A is not about price of taxable product, its about amount spend on taxable product. So, Alisa and Larry spend the same $100 and pay the same $7 in taxes. So, Larry actually paid a bigger portion of his income in taxes than Alisa. How does that help with the conclusion?