Question

Scenario:

You are a world traveler that made a fortune writing a series of novels. You earn more or less the same amount of income every year, $100,000, through book sales. Because you love traveling around the world, you decide to relocate to another country. When meeting with your accountant, he explains to you that where you relocate will impact how much income tax you must pay on your annual income. You narrowed down your choices to three locations, and your accountant found the following tax information for you.

Country 1: Czech Republic

Income level ($)	Marginal tax rate
All	15%

Country 2: Canada

Income level ($)	Marginal tax rate
0-40,000	20%
40,000-60,000	30%
60,000-100,000	50%
Over 100,000	55%

Country 3: Russia

Income level ($)	Marginal tax rate
0-20,000	50%
20,000-50,000	40%
50,000-100,000	20%
Over 100,000	10%

Required:

1. Determine whether each of these countries has a progressive, proportional, or regressive tax system.

2. Calculate the estimated annual income tax in each country. Where would you pay the least amount of taxes?

Answer 1

Lets briefly understand what is progressive, proportional & regressive tax system:

1. a] Progressive Taxation is a condition/norm where the tax rate charged to an individual is low who belongs to lower income slab & higher for the individual belonging to the higher income slab. In our case the progressive taxation is followed by the country Canada as we can see that with the level of income rising, the tax rate is higher.  Example: At $0 to $40000 income slab the tax rate is 20% i.e. the person earning $40000 will pay $8000 (20% of $40000) as tax. Whereas an individual earning $100000 will pay 20% on $40000, 30% on $20000 & 50% on $40000 which totals up to $34000 which is much higher.

Progressive taxation is adopted by the countries where generally there is the problem of inequality in income.

b] Regressive taxation is opposite to progressive taxation i.e. people belonging to lower income slab is taxed higher than the higher income slab. Again it is adopted by the country with higher level of income inequalities. So, in our case the country following regressive taxation is Russia.

c] Proportional Taxation is the norm where same % of tax is levied across all income groups. Therefore, here there is no bias amongst individuals from either slab of the income.  In our case Czech follows the proportional taxation system.

2] Calculation of tax:

	Proportional Taxation
	Czech Tax Calculation
	Tax Rate	15%
	Income	$100,000
	Payable Tax	$15,000
	Progressive Taxation
	Canada Tax Calculation
		Rate	Income Divided as per Slabs	Tax Amount
	Tax rate for income $0 - 40000	20%	40000	8000
	Tax rate for income $40000 - 60000	30%	20000	6000
	Tax rate for income $60000 - 100000	50%	40000	20000
		Total	100000	34000
	Progressive Taxation
	Canada Tax Calculation
		Rate	Income Divided as per Slabs	Tax Amount
	Tax rate for income $0 - 20000	50%	20000	10000
	Tax rate for income $20000 - 50000	40%	30000	12000
	Tax rate for income $50000 - 100000	20%	50000	10000
		Total	100000	32000

Highlighted amounts are the tax payables and the lowest tax is charged by Czech Republic.