If the government follows an income tax system in which personal income up to and including...

If the government follows an income tax system in which personal income up to and including
K2500 is not taxed, income of K2501 to K5000 is taxed at 10%, and income over K5000 is
taxed at 25%.
a) What is the marginal tax rate for a family earning income equal to K6000?
b) What is the average tax rate for a family earning income equal to K6000?
c) How much revenue will the government raise from an individual earning K6000?

d) What type of tax system prevails in this economy? Explain.
e) Distinguish between tax elasticity and tax buoyancy.

Solutions

Expert Solution

Marginal tax rate equals change in the taxes paid divided by the change in the taxable income.

When the taxable income increases from K5000 to K5001 i.e. $1 increase in taxable income will result in a tax of $ 0.25.

Hence, for a family earning income equal to K6000, the marginal tax rate is 25%.

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Taxes paid = (K5000 - K2501) 0.10 + (K6000 - K5001) 0.25

Taxes paid = K249.9 + K249.75

Taxes paid = K499.65

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The amount of revenue government raised by the government equals the total taxes paid by the individual earning K6000.

Revenue raised by the government = K499.65

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Progressive tax system prevails in this economy because people who earn higher income have to pay higher amount of tax and people earning lower income pay lower income tax.

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Tax elasticity refers to the percentage change in tax revenue due to a percentage change in the income.

The measurement of total change in the revenue due to change in the income is known as tax bouyancy.

jeff jeffy answered 1 year ago

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