Question

munire, Ahmed and maryam are three individuals who come from the same background and are as fast friends. As normal individuals in an economy, they earn money and spend the same on leading good lives .They are tax payers of a country with annual income of 26000, 39000 and 44000 respectively. A standard assumption is that all the three individuals spend approximately 12000 on purchase of essentials. These essentials are subject to sales tax. Based on the above case you are required to:

I) Calculate the tax being paid by each individual under a, b, c and d scenarios.

II) Comment in detail (using calculations from I) about features and effects of each of the given tax structures on individuals and on the economy.​​​

III) Comment giving justification as to which tax structure (a, b or c) would be the most beneficial to a country.​​​​​​​

TAX STRUCTURE

a) The country follows a flat tax rate of 15%.

b) The country follows a tax rate as follows:

​ Upto ​7499​​Nil

​7500 – 12999​​5 %

​13000- 23999​​10%

​24000 – 39999​20%

​Above 40000​​30%

c) The country follows a dual tax rate system as follows

​​Up to 24000​​10%

​​24000 and above​20%

d) The Sales tax rate in the country is 9%​

​​

Answer 1

I) Tax Paid under different Scenarios

Scenario	Computation		Munire	Ahmed	Maryam
		Income	26,000	39,000	44,000
		Spending	(12,000)	(12,000)	(12,000)
		Taxable Income	14,000	27,000	32,000
Scenario I	Flat Tax rate @15%	Tax @15%	2,100	4,050	4,800
Scenario II	Tax Slabs	Tax (refer note)	1,775	4,375	4,575
Scenario III	Dual Tax system		2,800	5,400	6,400
Scenario IV	Sales Tax @ 9%	9% on spendings	1,080	1,080	1,080

Note: 1
Tax Schedule	calculation	Rate	Munire	Ahmed	Maryam
			Income	Tax	Income	Tax	Income	Tax
Upto ​7499	First 7499 - Nil	0	7,500	-	7,500	-	7,500	-
​7500 – 12999	Next 5500 - 275	5%	5,500	275	5,500	275	5,500	275
​13000- 23999​​	Next 11000 - 1100	10%	11,000	1,100	11,000	1,100	11,000	1,100
​24000 – 39999​	Next 16000 - 3200	20%	2,000	400	15,000	3,000	16,000	3,200
​Above 40000​​							4,000
	Total		26,000	1,775	39,000	4,375	40,000	4,575

Note: 2
Tax Schedule	Rate	Munire	Ahmed	Maryam
		Income	Tax	Income	Tax	Income	Tax
Up to 24000​​	10%	24,000	2,400	24,000	2,400	24,000	2,400
​​24000 and above​	20%	2,000	400	15,000	3,000	20,000	4,000
		26,000	2,800	39,000	5,400	44,000	6,400

II)

• The Flat tax rate would be simplest for the individuals however, it puts burden on the low income category population, it may also increase savings and growth in economy dramatically.
• This may give relief to the low income group as the tax will be levied in proportion to the income earned equally accross the population, This will also increase economy as government will be able to collect more taxes from the higher income groups.
• The dual tax system also creates burden on the individuals as the income gets doubly taxed, however it may benifit the economy as the government will earn double revenue.
• The sales tax is levied on purchases made by the individuals, it is an indirect tax. However, as per US tax system the individuals are allowed to take credit of sales tax if they opt for itemised deductions.

III)

Referring to the above table, it is clear that the dual tax system will be most benificial to a country as it will create more revenue to the government. However, if the Individuals mindset is considered, the tax structure as per slab rates would be more benificial as it will fill the gap of relative poverty and low & high income earning group by charging tax proportionally based on the incomes earned.

Thank you!