Question

Country A follows a 20% tax rate structure on earned income across the board (Proportional). In country B, the taxation policy is progressive. The tax rate is 10% on the first $40K of income earned and then 40% on income in excess of $40K.

Calculate the total tax bill for both low ($40,000) and high income ($100,000) individuals in both countries. You MUST show your calculations.

Assuming all other decision-making factors are the same (i.e. climate, culture, language, etc.), are there any immigration incentives for the 40K or 100K wage earners? If so, how and why? Please explain.

Answer 1

In country A ..

For Low income individual tax= $40000*20%= $8000..

For High income individual tax= $100000*20%= $20000...

In country B..

For Low income individual tax= $40000*10%= $4000..

For High income individual tax= $40000*10% + $(100000-40000)*40% = $4000 + $60000*40% =$4000+$24000=$28000..

As all other decision making factors are same. then there is immigration incentive for Low income individual($40k) in country B. Because in country B he has to pay ($8000-$4000)=$4000 less taxes. Likewise there is immigration incentive for high income individual($100k) in country A as he has to pay ($28000-$20000)=$8000 less taxes there..

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