Briefly compare the three tax systems based on the relationship between the marginal tax rate and the average tax rate as income rises.

What will be an ideal response?

ANSWER:

The three tax systems are proportional, progressive, and regressive taxes. A proportional tax system is one in which the amount of taxes is proportional to income so that the marginal tax rate equals the average tax rate at all income levels. A progressive tax system is one in which a higher percentage of income is paid as taxes when income rises, so that the marginal tax rate is higher than the average tax rate when income rises. A regressive tax system is one in which a lower percentage of income is paid as taxes when income rises, so that the marginal tax rate is lower than the average tax rate when income rises.