Documented Problem Solving: Determining the Tax Structure

Linda Wilson, The University of Texas at Arlington
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Initial Publication Date: September 27, 2010

Summary

In class, the different tax structures were discussed. This exercise requires students to apply their knowledge about the different tax structures. Students are given income levels and must calculate the income tax rate. Then they are asked to determine the tax structure that is in place.

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Learning Goals

Students will:

  • recall the formula used to calculate the income tax rate;
  • apply the formula to specific situations;
  • compare the different situations to determine the tax structure.

Context for Use

This assignment can be used in any class size or institution type. It can be used as a review in class or outside of class as a homework assignment. Students can work together in small groups or use think-pair-share. It is appropriate for a Principles of Economics course or any other economics course that covers tax structures.

Description and Teaching Materials

This activity requires is a MC, T/F, or short answer question. Two of these options are given below.

If Jessica earns $40,000 per year and pays $6,000 in taxes, and Josh earns $35,000 per year and pays $6,000 in taxes, the tax system is considered to be:
a) Progressive.
b) Regressive.
c) Flat.
d) Proportional.

Answer: b

An example of a short answer question: If Jessica earns $40,000 per year and pays $6,000 in taxes, and Josh earns $35,000 per year and pays $6,000 in taxes, determine the tax structure that currently exists.

Teaching Notes and Tips

Students are sometimes confused about tax structures. They think they can simply look at the amount of income and the amount of tax paid and determine the tax structure. This is not always the case. If students take the time to calculate the percentage of tax paid, they are much more likely to understand the concepts and arrive at the correct answer. In this example, some students may think the tax structure is proportional or flat since both individuals pay $6,000 in tax.

Assessment

A rubric such as this one can be used to find student errors or misunderstandings. The instructor can use the rubric or students can use the rubric to assess their own solution or that of another classmate.

  1. Review the lecture notes or text for definitions of tax structures - progressive, regressive, and proportional.
  2. Find the formula to calculate the percentage of tax paid. It is the (amount of tax paid ÷ income earned) X 100%.
  3. Use the formula to calculate Jessica's tax rate: ($6,000 ÷ $40,000) X 100%, so the rate is 15.0%.
  4. Use the formula to calculate Josh's tax rate: ($6,000 ÷ $35,000) X 100%, so the rate is 17.1%.
  5. Refer to the definitions again. In this case, when income rises the percentage of tax paid does not go up. Instead it goes down.
  6. A regressive tax structure is defined as one in which the tax percentage decreases as income rises, so this is an example of a regressive tax structure.

References and Resources

Angelo, T.A. and Cross, K.P. (1993). Classroom Assessment Techniques: A Handbook for College Teachers. San Francisco: Jossey-Bass.