Tax Rates in a Regressive System with Flat Marginal Bracket

Steps:

• Define average tax rate as total tax divided by total income; it reflects overall burden.
• Define marginal tax rate as tax on additional income divided by that income increment; it applies to the next dollar earned.
• In the Y1 to Y2 range, the tax schedule shows a constant marginal rate (flat bracket).
• As income rises, the average rate falls because lower-income portions face relatively higher effective burdens that dilute with growth.

Why C is correct:

• Average rate decreases as income rises (total tax grows slower than income), while marginal rate stays constant per the bracket's flat rate formula: ΔTax / ΔIncome = constant.

Why the others are wrong:

• A: Marginal rate does not decrease; it remains constant in this bracket.
• B: Average rate is not constant; it declines with rising income.
• D: Marginal rate does not decrease; it is fixed in the range.

Final answer: C