Below is a table showing the income of individuals A and B together with their food and clothing purchases in an untaxed environment (NOTE: K = 1000).
Individual Income Food Clothing
A $20,000 $5,000 $2,000
B $50,000 $8,000 $8,000
Before even considering any particular numbers, define precisely what is meant when we say that a tax system is regressive. Do the same for what is meant by progressive.
Suppose a general sales tax of 5% is applied to all purchases, and purchasing behavior does not change as a result. In consideration of the sum total of ALL sales taxes paid, illustrate why this tax system is regressive. Hint: Develop a calculation table for analysis.
There is a proposal on the government table to exempt EITHER food OR clothing from the sales tax base. The purpose of this proposal is to seek progressivity rather than regressivity in the sales tax system. Provide a reasoned recommendation supported by calculations as to which option should be selected.