Question

salim, mohammed and khalid 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 20000, 29000 and 34000 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 18%

B) The country follows a tax rate as follows:

​ Up to ​3499​​Nil

​3500 – 7999​​5 %

​8000- 20999​​15%

​21000 – 32999​25%

​Above 33000​​35%

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

​​Up to 17500​​12%

​​17500 and above​18%

D) The Sales tax rate in the country is 11%​​​​.

Answer 1

1	Calculation of tax
		Salim	Mohammed	Khalid
	Income	20000	29000	34000
Scen.	Purchase Expense	12000	12000	12000
A	Tax under Senerio A (18% flat tax)	3600	5220	6120
B	Tax under Senerio B (Multiple Slab Rates)	2160	5310	5660
C	Tax under Senerio C (Dual rate)	2550	4170	5070
D	Tax under Senerio D (Sales Tax of 11%) on purchase	1320	1320	1320
2	Comment on above tax scenarios on individual and economy
	As observed in calculation above, equal tax rate in Sce. A is leading to higher tax payment by Salim who is low earning person. This increases revenue of Government but increases the income inequality in economy. The Sce. B is an ideal tax structure which increases tax rate in multiple slab as per the growing income of individual. Scenario C of dual rate is less effective than Scen. B. Under sales tax all the income group people are charges equally as it is consuption based tax and not income based.
3	Scenario C tax system is most benefiacial to the country as it charges more tax rate with the each slab of increasing income. This leads to reducing the income inequality in the country.