Question

In: Finance

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

a)

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%.

---------------------------------------------------------------------

b)

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

Taxes paid = K249.9 + K249.75

Taxes paid = K499.65

----------------------------------------------------------------------------

c)

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

--------------------------------------------------------

d)

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.

--------------------------------------------------------------------------------

e)

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.


Related Solutions

Consider a government that imposes a personal income tax. It is estimated that the tax will...
Consider a government that imposes a personal income tax. It is estimated that the tax will not affect total labour supplied in the economy. Given this, the political party advocating for the tax argue that the tax acts as a non-distortionary, lump-sum tax, and as such imposes no excess burden. Is this a reasonable argument?
Consider a government that imposes a personal income tax. It is estimated that the tax will...
Consider a government that imposes a personal income tax. It is estimated that the tax will not affect total labour supplied in the economy. Given this, the political party advocating for the tax argue that the tax acts as a non-distortionary, lump-sum tax, and as such imposes no excess burden. Is this a reasonable argument?
Which is necessarily true if the government were to replace a progressive income tax system with...
Which is necessarily true if the government were to replace a progressive income tax system with a proportional one? 1) Lower income groups would pay less tax 2) Higher income groups would pay more tax 3) All tax burdens would be exactly the same 4) The distribution of after-tax income would become less equal The Federal payroll (Social Security) tax: 1) Increases the progressivity of the Federal tax system 2) Reduces some of the progressivity of the Federal tax system...
Income tax rates schedule “ (1) for the Personal Income Tax Net income which does not...
Income tax rates schedule “ (1) for the Personal Income Tax Net income which does not exceed 300,000 baht 5 percent Net income which only the amount in excess of    300,000 baht but not exceeding    500,000 baht 10 percent Net income which only the amount in excess of    500,000 baht but not exceeding    750,000 baht    15 percent Net income which only the amount in excess of    750,000 baht   but not exceeding 1,000,000 baht   20 percent Net income which only the...
Suppose the government of Mascolia is considering replacing its income tax system with a consumption tax....
Suppose the government of Mascolia is considering replacing its income tax system with a consumption tax. Assume that the government's revenue requirement would be the same under either system. (a) How would the base of a consumption tax compare with the base of an income tax? Does this have implications for the magnitude of the tax rate on consumption versus the magnitude of the tax rate on income? Explain. (b) Compare the income tax and consumption tax in terms of...
uppose the government of Mascolia is considering replacing its income tax system with a consumption tax....
uppose the government of Mascolia is considering replacing its income tax system with a consumption tax. Assume that the government's revenue requirement would be the same under either system. (a) How would the base of a consumption tax compare with the base of an income tax? Does this have implications for the magnitude of the tax rate on consumption versus the magnitude of the tax rate on income? Explain. (b) Compare the income tax and consumption tax in terms of...
haig-simmons provides a definition of income which provides the basic construct of the personal income tax...
haig-simmons provides a definition of income which provides the basic construct of the personal income tax . Please explain that definition , discussing how taxable income is determined . The tax is progressive , not only as a result of the rate structure , but also because of the addition of certain credits . Please provide an example
AD AS problem 6) Government increases its spending and reduces personal income tax rates (assume no...
AD AS problem 6) Government increases its spending and reduces personal income tax rates (assume no crowding out). The economy is far from potential (recession). (Use the neoclassical synthesis) 7) The economy experiences a significant increase in production technology (show a classical model (LRAS))
Personal Federal income tax rate is 30%. You are trying to decide which of the following...
Personal Federal income tax rate is 30%. You are trying to decide which of the following bonds to invest in. Both are BBB rate. 1.) Kentucky Bond has a 3.2% yield. 2.) Boeing has a 4.5% yield. Which bond would you invest in and why? Show work ... this is all the given information
1. which of the following describes the original design intent of the federal personal income tax...
1. which of the following describes the original design intent of the federal personal income tax a) regressive tax b) proportional tax c) poll tax d) progressive tax e) payroll tax 2. bobby pays a tax of $5000 on her income of $50,000 while brad pays a tax of $700 on his income of $18,000 a) regressive b) a flat tax c) proportional d) progressive 3.an example of progressive tax is a) the excise tax of cugarettes b) the federal...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT