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

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Director
Joined: 29 Jul 2006
Posts: 856
One state adds a 7 percent sales tax to the price of most [#permalink]

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25 Nov 2006, 03:20
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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 stateâ€™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.

Senior Manager
Joined: 17 Oct 2006
Posts: 433

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25 Nov 2006, 03:47
Don't understand quite well. But my guess would be A here.
VP
Joined: 15 Jul 2004
Posts: 1445
Schools: Wharton (R2 - submitted); HBS (R2 - submitted); IIMA (admitted for 1 year PGPX)

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25 Nov 2006, 03:52
A for me too
VP
Joined: 21 Aug 2006
Posts: 1016

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25 Nov 2006, 07:48
vineetgupta 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.

Government taxes us in two ways. One is tax over income, another is tax over expenditure. Tax over expenditure means, whenever we purchase something, there is tax laid over that purchase. In the argument above the case is of tax over expenditure.

The argument is saying that poor are taxed more (proportionate to income) if the tax on expenditure method is followed..that is possible, only if a poor person and a rich person are spending spending same amount on products, as mentioned in option A.

If a poor man makes \$2k per month, and he is taxed over an amount of \$500 that is spent over products, and a rich man makes \$ 20k per month, and taxed over an amount of \$500 that he is spening over products, then poor man is being taxed more heavily. No?

(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 stateâ€™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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VP
Joined: 22 Oct 2006
Posts: 1438
Schools: Chicago Booth '11

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25 Nov 2006, 10:13
I go for A...

it states the price of most products in the question

so in order to make any assumptions we have to know that the same products are being purchased and the state tax is equal across income levels

if most products are bought by low income people are not sales taxed then that conclusion would be invalid, ASSUMING that all people are effected by the sales tax equally makes the conclusion valid
Director
Joined: 24 Aug 2006
Posts: 745
Location: Dallas, Texas

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25 Nov 2006, 12:39
Say a person who earns \$100,000 and a person who earns \$30,000 spend same amount - \$1000 - on these products.
For person1, tax it \$70/\$100,000 of income.
For person2 , tax is \$70/\$30,000 of income.

By that rule, the tax burden is more on lower income group.

A
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Senior Manager
Joined: 19 Jul 2006
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25 Nov 2006, 18:16
A
25 Nov 2006, 18:16
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