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

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One state adds a 7 percent sales tax to the price of most [#permalink]

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03 Jul 2011, 13:28
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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.

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03 Jul 2011, 14:14
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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.

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" _________________ Director Status: Prep started for the n-th time Joined: 29 Aug 2010 Posts: 707 Followers: 5 Kudos [?]: 136 [0], given: 37 Re: One state adds a 7 percent sales tax... [#permalink] ### Show Tags 03 Jul 2011, 19:33 Clear A. If it is considered that tax amount is inversely proportional to income, it should also be assumed that the money spent on products is same across income groups. Crick Intern Joined: 11 Oct 2010 Posts: 27 Followers: 0 Kudos [?]: 0 [0], given: 0 Re: One state adds a 7 percent sales tax... [#permalink] ### Show Tags 03 Jul 2011, 20:35 clear A Manager Status: ==GMAT Ninja== Joined: 08 Jan 2011 Posts: 247 Schools: ISB, IIMA ,SP Jain , XLRI WE 1: Aditya Birla Group (sales) WE 2: Saint Gobain Group (sales) Followers: 5 Kudos [?]: 66 [0], given: 46 Re: One state adds a 7 percent sales tax... [#permalink] ### Show Tags 04 Jul 2011, 11:31 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"

Great Explanation Fluke
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04 Jul 2011, 13:07
thanks Fluke
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05 Jul 2011, 21:35
A it is...
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05 Jul 2011, 22:01
Federal income tax: more income, more tax, more annual rate of tax
Sales Tax: more income, same spend as less income(assumption A) same tax, and thus lower percentage of the 'more income'
elimination of other choices:
B - Even if this could affect the conclusion, in this case it can't because this is incorrect as per the understanding from the premise- fed tax favors low income group and sales tax achieves the reverse
C - affordability of various groups to pay taxes is not a question here
D - that doesnt explain why the low income groupes will pay tax at higher rates
E - If that were so, it will not have reverse effect as fed tax!
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06 Jul 2011, 09:15
I find it hard to believe that this is a level 700 question.
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06 Jul 2011, 11:58
144144 wrote:
I find it hard to believe that this is a level 700 question.

Hey 144144
you think it higher than that or lower than that????????
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06 Jul 2011, 20:02
IMO 500-600
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07 Jul 2011, 03:53
144144 wrote:
IMO 500-600

Even i thought so
i thought no one would think that deep in real GMAT

maybe you are more intelligent than me and you can think that deep
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08 Jul 2011, 02:15
Clearly A
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18 Aug 2011, 23:50
Warlock007 wrote:
144144 wrote:
IMO 500-600

Even i thought so
i thought no one would think that deep in real GMAT

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

hehe, gmatclub should have a like button in front of each post. In that case I would have liked Warlock's post.
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07 Sep 2011, 03:01
A it is
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07 Sep 2011, 18:54
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.

A it is. Since the bare essentials are common for all income levels, lower income level people will end
up paying higher percentage of their income as taxes compared to rest.
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05 Oct 2011, 02:19
thanks for this!

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.

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"

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05 Oct 2011, 07:37
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07 Oct 2011, 01:08
I agree with A.

Looks like the CR deals with regressive taxation!
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18 Oct 2011, 05:22
Great explanation fluke !
Re: One state adds a 7 percent sales tax...   [#permalink] 18 Oct 2011, 05:22

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