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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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16 May 2012, 21:40
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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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16 May 2012, 22:15
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Premise : 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

Conclusions : the lower the income, the higher the annual percentage rate at which the income is taxed.

So here assumption is : Everybody, regardless of income level, would spend equal amount on goods they buy.

For Ex.
A person who earns $1000 / month, spend$ 100 to purchase a good so He would be paying 7$as Sales tax, which, if considered, Income tax would be 0.70% A person who earns$2000 / month, spend $100 to purchase a good so He would be paying 7$ as Sales tax, which, if considered, Income tax would be 0.35%
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18 May 2012, 23:43
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31 May 2012, 04:33
sahilkmr wrote:

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31 May 2012, 12:10
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piyushksharma 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.

You have to really understand the structure of the sentence here in order to figure out what direction you're going.
If you read this sentence with the part following the ":" as describing the federal income tax, you would be wrong.

The portion after the ":" is actually describing "this tax". We just know that "this tax" has the reverse effect of "federal income tax" - why? Because of the material after the ":" - higher % taxes when income is lower.

So, it's "this tax" that has higher % of taxes when income is lower....NOT that federal income tax has higher % tax rate on lower income people.

How do we know that "this tax" has a higher % of taxes? Well, we have one statement/fact that sales tax is 7%. In order to support and strengthen the link between assumption and argument (ie sales tax being 7% affecting "this tax" having higher tax % for lower income ppl)?

Well, if we know that everyone spends the same amount on products and pays the same amount in sales tax (in terms of actual dollar figures), then we know for sure that the % on the lower income ppl is going to be higher.

$10 in sales tax on$100 income is 10%.
$10 in sales tax on$1000 income is 1%.
Clearly, the rich guy is paying lower sales tax as a percentage of overall income, while paying equally in terms of actual sales tax dollars paid.

The reason why this matters is it can be entirely true that rich ppl buy more products and as a result pay more in overall sales taxes. It's quite possible that rich ppl pay $100 in sales taxes because they buy more, and as a % of overall income it's equal to poor people at 10%. By introducing the fact that everyone spends the same, we eliminate this possibility leaving the only possibility that poorer people pay higher % of their income toward these sales taxes. Moderator Joined: 01 Sep 2010 Posts: 2870 Followers: 639 Kudos [?]: 5063 [0], given: 871 Re: SOLVE THIS One [#permalink] ### Show Tags 06 Jun 2012, 18:26 Expert's post So the OA for this question is A or B ??? I picked B. _________________ Manager Joined: 02 Jan 2011 Posts: 201 Followers: 1 Kudos [?]: 49 [0], given: 22 Re: SOLVE THIS One [#permalink] ### Show Tags 06 Jun 2012, 21:17 Thank you for a very good explanation GmatPill. I went with A as well. Intern Joined: 17 May 2012 Posts: 17 Followers: 0 Kudos [?]: 0 [0], given: 2 Re: SOLVE THIS One [#permalink] ### Show Tags 07 Jun 2012, 08:34 Great question! Nice explanation by the GMATpill Instructor. BSchool Forum Moderator Status: Flying over the cloud! Joined: 17 Aug 2011 Posts: 913 Location: Viet Nam Concentration: International Business, Marketing GMAT Date: 06-06-2014 GPA: 3.07 Followers: 69 Kudos [?]: 472 [0], given: 44 Re: SOLVE THIS One [#permalink] ### Show Tags 07 Jun 2012, 21:40 Great explanation from gmatpill. _________________ Rules for posting in verbal gmat forum, read it before posting anything in verbal forum Giving me + 1 kudos if my post is valuable with you The more you like my post, the more you share to other's need CR: Focus of the Week: Must be True Question Intern Joined: 05 Dec 2011 Posts: 47 Followers: 0 Kudos [?]: 1 [0], given: 18 Re: SOLVE THIS One [#permalink] ### Show Tags 07 Jun 2012, 22:36 Nice question,good explanation Manager Affiliations: Project Management Professional (PMP) Joined: 30 Jun 2011 Posts: 213 Location: New Delhi, India Followers: 5 Kudos [?]: 52 [0], given: 12 Re: SOLVE THIS One [#permalink] ### Show Tags 12 Jun 2012, 07:07 Great Question and an equally amazing explanation by GMAT Pill.. thanks _________________ Best Vaibhav If you found my contribution helpful, please click the +1 Kudos button on the left, Thanks Manager Joined: 12 Mar 2012 Posts: 171 Location: India Concentration: Technology, General Management GMAT Date: 07-23-2012 WE: Programming (Telecommunications) Followers: 0 Kudos [?]: 43 [0], given: 4 Re: SOLVE THIS One [#permalink] ### Show Tags 12 Jun 2012, 09:26 very difficult one. got A in 2:19 :-/ btw nice explanation by gmatpill. _________________ FOCUS..this is all I need! Ku-Do! Senior Manager Joined: 15 Sep 2009 Posts: 271 GMAT 1: 750 Q V Followers: 10 Kudos [?]: 66 [0], given: 6 Re: SOLVE THIS One [#permalink] ### Show Tags 19 Jun 2012, 09:12 A by POE. Excellent breakdown by GMATPill. Posted from my mobile device _________________ +1 Kudos me - I'm half Irish, half Prussian. Manager Status: Time to apply! Joined: 24 Aug 2011 Posts: 220 Location: India Concentration: Finance, Entrepreneurship GMAT 1: 600 Q48 V25 GMAT 2: 660 Q50 V29 GMAT 3: 690 Q49 V34 GPA: 3.2 WE: Engineering (Computer Software) Followers: 4 Kudos [?]: 68 [1] , given: 166 Re: One state adds a 7 percent sales tax to the price of most [#permalink] ### Show Tags 07 Jul 2012, 01:13 1 This post received KUDOS 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. Consider two citizens - Mr R ( Mr rich) and Mr P ( Mr Poor) Income of R per year :$1000
Amount of money spent on different products by R per year = $10 Amount of sales tax R has to pay = 7% of$10 = $0.7 Annual percentage on which the income of R is taxed = .07/1000 * 100 = .007% Income of P per year:$100
Amount of money spent on different products by P per year = $10 Amount of sales tax R has to pay = 7% of$10 = \$ 0.7
Annual percentage on which the income of R is taxed = .07/100 * 100 = .007%

So, we find that if the amount of money citizens spend on products subject to the state tax tends to be equal across income levels, then the lower the income, the higher the annual percentage rate at which the income is taxed.
Hence (A) is indispensible for the conclusion. So, this is the correct answer choice
(B) The federal income tax favors citizens with high incomes, whereas the state sales tax favors citizens with low incomes.
This option does not give a quantitative analysis as to how there would be higher annual percentage rate of taxation when income is lower.
(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.
We are not concerned whether people can afford to pay the tax or not. We are interested to now why there would be higher annual percentage rateof taxation when income is lower.
(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.
This is out of scope. We are not bothered whether income is redistributed 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.
This is also out of scope. This doesnt explain why there would be higher annual percentage rate of taxation when income is lower.
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Re: One state adds a 7 percent sales tax to the price of most [#permalink]

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07 Jul 2012, 02:15
Oops i thought B. Dint really understand the question, took a guess as time was running out ;(

good explanation by gmatpill and praticegmat
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Re: One state adds a 7 percent sales tax to the price of most [#permalink]

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18 Jul 2012, 04:18
me too .. as the time was running out i chose B in 2:11
then i read the question again and got A right ..
didnt understnd the question at the first go
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Re: One state adds a 7 percent sales tax to the price of most [#permalink]

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29 Jul 2012, 23:44
i picked A. whats the OA. I think A pass the negation test.
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Re: One state adds a 7 percent sales tax to the price of most [#permalink]

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30 Jul 2012, 01:02
piyushksharma 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.

My 2 cents:

By reading the premises, i could infer: there is a sales tax applicable on all the products - connection of this tax on income levels - which is NEGATIVE - So, possibly people are paying equal taxes across income levels

(A) Same as i prephrased
(B) There's no indication of favoring income levels mentioned. So, OOS
(C) It doesn't say talk about low income tax for lower level of income
(D) Out of scope
(E) Again out of scope

Partly used prephrasing of assumption & partly POE technique

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

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30 Jul 2012, 03:39
Picked B.
After reading the reply by Gmat Pill, I now understand why it is A.
Thank you GMAT Pill.
Re: One state adds a 7 percent sales tax to the price of most   [#permalink] 30 Jul 2012, 03:39
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