State A has a sales tax of 4% that it applies to all goods and services. Consider the following households composed of four persons each located in State A. The Richardson family has an annual income of $20,000 and purchases $4,000 yearly from grocery stores. The Kubeks have an income of $50,000 a year and spend $8,000 at grocery stores. Neither family saves any of its income.
a. Calculate the amount of sales tax each family pays for grocery store items and the amount of total sales tax they pay.
b. Calculate the fraction of income each family allocates to sales tax payment.
c. The governor of State A says that taxing food is unfair to low-income families and says she will propose that the state exempt grocery store food from taxation. Evaluate the governor’s proposal in terms of cost, effectiveness, and progressivity.
d. A state senator agrees with the governor that low-income families need help, but says a tax credit will be more effective in providing relief. He proposes that the state continue to tax food, but grant a $50 per person tax credit for sales taxes paid on grocery store food (regardless of what anyone really spent). Evaluate this proposal in terms of cost, effectiveness, and progressivity.