Question

The govt of bigtown is concerned about its revenues. It has increased it tax rate from 2.2% to 2.8% fr companies with net business income exceeding $2M while at the same time reducing the rate from 2.2% to 1.9% for companies with net business income between $1M and $2M. Companies with less than $1M net business income are not taxed. Requirements: For each of the following 4 situations: a, determine total projected govt revenues before and after the tax increase. b, explain in couple of sentences whether and why you consider this good or bad tax policy. Situation 1: The total amount of net taxable business income for companies with income exceeding $2M remains static at $50M and net taxable income for companies with income between $1M and $2M remains static at $100M for the entire town. Situation 2: total amount for the net taxable business income decreases from $ 50M to $48Mfor companies with income exceeding $2M due to business moving to a different jurisdiction. The net taxable income for companies with income between $1M and $2M remains static at $100M. Situation 3: the total amount of net taxable income for businesses with income exceeding $2Mdecreases from $50M to $45M ue to bsiness moving to different jurisdiction. However, total taxable income for companies with income between $1M and $2M increased from $100M to $110M. Situation 4: total amount of net taxable business income for businesses with income exceeding $2M decreases from $50M to $47M due to business moving in different jurisdiction. However, total taxable income for companies with income between $1M to $2M increased from $100M to $120M.

Answer 1

Situation 1
	Net taxable income	Tax rate before change	Projected govt. revenue	New Tax rate	Projected govt. revenue after change
Companies with income exceeding $2M	$50M	2.20%	$1.1M	2.80%	$1.4M
Companies with income between $1M and $2M	$100M	2.20%	$2.2M	1.90%	$1.9M
			$3.3M		$3.3M
In this situation, govt. revenue is same before and after the increase in tax rate, as the govt. is reducing
the tax rate for the companies with income between $1M and $2M. This is a good tax policy as the tax burden is shifted to
companies with income exceeding $2M
Situation 2
	Net taxable income	Tax rate before change	Projected govt. revenue	New Tax rate	Projected govt. revenue after change
Companies with income exceeding $2M	$48M	2.20%	$1.056M	2.80%	$1.344M
Companies with income between $1M and $2M	$100M	2.20%	$2.2M	1.90%	$1.9M
			$3.256M		$3.244M
In this situation, projected govt. revenue decreased after the changes in the tax rate. This is a bad tax policy
due to which companies are moving to different jurisdiction with lower tax rates
Situation 3
	Net taxable income	Tax rate before change	Projected govt. revenue	New Tax rate	Projected govt. revenue after change
Companies with income exceeding $2M	$45M	2.20%	$0.99M	2.80%	$1.26M
Companies with income between $1M and $2M	$110M	2.20%	$2.42M	1.90%	$2.09M
			$3.41M		$3.35M
In this situation, projected govt. revenue decreased after the changes in the tax rate. This is a good tax policy
as the tax for lower income group is decreased and tax for higher income group is increased which is fair.
Situation 3
	Net taxable income	Tax rate before change	Projected govt. revenue	New Tax rate	Projected govt. revenue after change
Companies with income exceeding $2M	$47M	2.20%	$1.034M	2.80%	$1.316M
Companies with income between $1M and $2M	$120M	2.20%	$2.64M	1.90%	$2.28M
			$3.674M		$3.596M
In this situation, projected govt. revenue decreased after the changes in the tax rate. This is a good tax policy
as the tax for lower income group is decreased and tax for higher income group is increased which is fair.