Question

In: Economics

Country A follows a 20% tax rate structure on earned income across the board (Proportional). In...

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.

Solutions

Expert Solution

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..

(Please give an up vote if you find it helpful)..

Rahul Sunny answered 2 years ago
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