Suppose, on average, a family in Church Falls earning 60,000 per ...

[WWatsford]

Suppose, on average, a family in Church Falls earning 60,000 per year paid 6 percent of its income in state taxes. A family earning 80,000 paid, on average, 4,760 in state income taxes.
 
  Are state taxes in Church Falls progressive or regressive? Be sure to explain the difference between a progressive tax and a regressive tax.

Question 2

The underground economythe informal sectorcan be a significant drag on the economies of developing countries. Why are firms in the informal sector often less efficient than firms in the formal sector?
 
  What will be an ideal response?

[macybarnes]

Answer to Question 1

A regressive tax is a tax for which people with lower incomes pay a higher percentage of their income in tax than do people with higher incomes. A progressive tax is a tax for which people with lower incomes pay a lower percentage of their income in tax than do people with higher incomes. If a family earning 80,000 paid 4,760 in taxes, then the average tax rate at this income level is 4,760  80,000 = 5.95. This means people with lower incomes pay a slightly higher percentage of their income in state taxes than do people with higher incomes. Therefore, the state tax in Church Falls is regressive.

Answer to Question 2

Entrepreneurs of the firms in the informal sector limit their investments in capital equipment because they are afraid that the firms will someday be shut down. The workers in the firms, consequently, have less capital equipment to work with.