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One state adds a 7 percent sales tax to the price of most

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Re: One state adds a 7 percent sales tax... [#permalink] New post 18 Oct 2011, 08:25
fluke wrote:
achan wrote:
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.

Now,
$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.

Ans: "A"


May be I am missing something here -

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?

My choice is B.
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Re: One state adds a 7 percent sales tax... [#permalink] New post 18 Oct 2011, 12:14
Warlock007 wrote:
144144 wrote:
IMO 500-600


Even i thought so
but after getting the answer wrong and after reading Fluke's explanation
i thought no one would think that deep in real GMAT :? :?

maybe you are more intelligent than me and you can think that deep :? :?


Option A - The amount of money citizens spend on products subject to the state tax tends to be equal across income levels.

Fluke good explanation. I agree with Warlock007 that reading Fluke's explanation, no one would think that deep in real GMAT..

This is how I solved it..the questions asks for a premise. Only option A logically fits after the first premise “One state…. most products purchased within its jurisdiction” and then follows the conclusion. Please share your thoughts.
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Re: One state adds a 7 percent sales tax... [#permalink] New post 18 Oct 2011, 20:41
+1 for A
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Re: One state adds a 7 percent sales tax to the price of most [#permalink] New post 25 Apr 2012, 02:35
This is such as wonderful explanation, thank you +kudo
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Re: One state adds a 7 percent sales tax to the price of most [#permalink] New post 27 Jun 2014, 01:30
Hello from the GMAT Club VerbalBot!

Thanks to another GMAT Club member, I have just discovered this valuable topic, yet it had no discussion for over a year. I am now bumping it up - doing my job. I think you may find it valuable (esp those replies with Kudos).

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Re: One state adds a 7 percent sales tax to the price of most   [#permalink] 27 Jun 2014, 01:30
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