BREAKING: Target Test Prep releases Brand New 2026 On Demand GMAT prep course

Redeem

sales tax & fed tax

This topic has expert replies
Post new topic Post Reply
Previous Topic Next Topic
User avatar
Newbie | Next Rank: 10 Posts
Posts: 2
Joined: Sun Jun 24, 2012 8:44 pm

sales tax & fed tax

by desdinova » Wed Jun 27, 2012 7:22 am
hi, can anyone help find the ans with explanation

One state adds a 7 percent sales tax to the price of most products purchased within its jurisdiction. This tax, therefore, if viewed as tax on income, has the reverse effect of the federal income tax: the lower the income, the higher the annual percentage rate at which the income is taxed.
The conclusion above would be properly drawn if which of the following were assumed as a premise?
(A) The amount of money citizens spend on products subject to the state tax tends to be equal across income levels.
(B) The federal income tax favors citizens with high incomes, whereas the state sales tax favors citizens with low incomes.
(C) Citizens with low annual incomes can afford to pay a relatively higher percentage of their incomes in state sales tax, since their federal income tax is relatively low.
(D) The lower a state's sales tax, the more it will tend to redistribute income from the more affluent citizens to the rest of society.
(E) Citizens who fail to earn federally taxable income are also exempt from the state sales tax.
Top
Source: — Critical Reasoning |
User avatar
GMAT Instructor
Posts: 1248
Joined: Thu Mar 29, 2012 2:57 pm
Location: Everywhere
Thanked: 503 times
Followed by:192 members
GMAT Score:780

by Bill@VeritasPrep » Wed Jun 27, 2012 1:03 pm
Conclusion: the 7 percent sales tax has the opposite effect of the income tax.

Income tax percentages increase as income increases. If sales tax has the opposite effect, then its effective rate decreases as income increases.

Which answer is required for that to make sense?

A--Correct. Since the sales tax is a flat rate, the amount spent on taxable goods determines its effective rate. If citizens spend the same amount on taxable goods, then the effective rate decreases as income increases. For example:

Each citizen spends $1000 on taxable goods. At 7 percent, each citizen pays $70 in sales tax. If person A makes $2,000, then that $70 is 3.5 percent of their income. If person B makes $4,000, then that $70 is 1.75 percent of their income.

B--Irrelevant. We aren't looking at favoritism in tax rates.

C--Irrelevant. The argument is simply about the effect of sales tax.

D--Irrelevant. There is nothing about income redistribution.

E--This may contradict the argument.
Join Veritas Prep's 2010 Instructor of the Year, Matt Douglas for GMATT Mondays

Visit the Veritas Prep Blog

Try the FREE Veritas Prep Practice Test
Top
Master | Next Rank: 500 Posts
Posts: 299
Joined: Tue Feb 15, 2011 10:27 am
Thanked: 9 times
Followed by:2 members

by hey_thr67 » Wed Jun 27, 2012 5:44 pm
IMO is A.


The technique is to isolate the conclusion first and then directly see if the assumption is necessary for the conclusion or not. Here the conclusion is,

the lower the income, the higher the annual percentage rate at which the income is taxed.

Now let's look at the ans choices.

(A) The amount of money citizens spend on products subject to the state tax tends to be equal across income levels.

If this condition doesn't hold then we can not say what effect it has on citizens with different salaries. It might be the case that citizen with higher salaries have higher sales tax. In that condition conclusion doesn't hold true. Hence this answer choice is CORRECT.

(B) The federal income tax favors citizens with high incomes, whereas the state sales tax favors citizens with low incomes. WRONG.

This statement is not necessary for the conclusion to be drawn. This is an example of scope shift. The conclusion is not about what favours what ?

(C) Citizens with low annual incomes can afford to pay a relatively higher percentage of their incomes in state sales tax, since their federal income tax is relatively low.

Again a scope shift. The argument is not about affordability. WRONG.

(D) The lower a state's sales tax, the more it will tend to redistribute income from the more affluent citizens to the rest of society.

Generalization is not what is intended here. WRONG.

(E) Citizens who fail to earn federally taxable income are also exempt from the state sales tax.

Out of scope. WRONG.


This question seems relatively easy. as other choices seem to be out of scope. [/i]
Top
Senior | Next Rank: 100 Posts
Posts: 90
Joined: Wed Mar 21, 2012 1:27 am
Thanked: 5 times
Followed by:2 members

by sandeep_thaparianz » Wed Jun 27, 2012 8:01 pm
+1 for A
Top
Post new topic Post Reply
• Page 1 of 1