Logical Reasoning

PT116 · S3 · Q15 In 1975, a province reduced

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In 1975, a province reduced its personal income tax rate by 2 percent for most taxpayers.

Background

They lowered the personal income tax rate by 2% each of the last two years.

Surprising Thing

In the first year of lowered income tax rate, the overall personal income tax collected was the same as before. In the second year of even-lower income tax rate, the overall personal income tax collected went up a bunch.

Evaluate / Goal

GIVEN THAT ... the personal income tax rate got lowered 2% in each of the last two years,

HOW CAN IT BE THAT ... total money collected from personal income taxes stayed same and then went up a bunch last year?

4 answers will explain how that could be. 1 will be irrelevant or make the paradox more surprising.

15.

Each of the following, if true, could help to resolve the apparent discrepancy described above EXCEPT:

  1. The years 1975 and 1976

    Helps Explain

    During the two years when taxes were lower, there was more money in the economy in general (more prosperous). 28% of a richer nation's economy could be more than 32% of a less prosperous nation's economy. (I'm just making up 28% as the new tax rate after a 32% rate was reduced by 2% for two years in a row)

    9% picked this

  2. The definition of “personal income”

    Helps Explain

    If the definition is widened, then there is more money being taxed as personal income ... 28% of a bigger pool of money is more than 32% of a smaller pool.

    7% picked this

  3. The personal income tax rate

    Helps Explain

    The rich people are being taxed more, so even though most people went from 32% to 28%, rich people went from 40% to 50%. A smaller tax slice of poorer people combined with a juicier tax slice of richer people could end up netting more tax revenue.

    7% picked this

  4. Correct

    The province’s total revenue from

    Why this is right

    Other types of tax revenue is out of scope. We're only concerned with explaining how lower rates on personal income tax could result in higher total revenue from personal income tax. This just restates the paradoxical fact (while adding that non-personal income tax is also rising), but we still don't have a cause for why it's rising.

    Skill tested: Paradox · how this choice captures the argument's function is the move to repeat next time.

    71% picked this

  5. A large number of people

    Helps Explain

    More people move in, more people to tax. 28% of a bigger population could bring more tax money than 32% of a smaller population.

    6% picked this

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