Question

Our current system of federal income tax has seven tax brackets, starting at 10% for income up to about $10k for a single person, and caps out at 37% for income above $500k. (We’ll ignore all the loopholes.) Suppose that instead of doing things this way, we tried to create a tax in which everyone pays the amount of money that would reduce the utility of their pre-tax income by (say) 10%. What would happen to the amount that people pay, and why? Explain your answer both for the case of someone who is currently in the lowest income bracket as well as someone in the highest. (You don’t need to use exact numbers.)

Answer 1

Our current system of federal income tax has seven tax brackets, starting at 10% for income up to about $10k for a single person, and caps out at 37% for income above $500k. (We’ll ignore all the loopholes.) Suppose that instead of doing things this way, we tried to create a tax in which everyone pays the amount of money that would reduce the utility of their pre-tax income by (say) 10%. What would happen to the amount that people pay, and why? Explain your answer both for the case of someone who is currently in the lowest income bracket as well as someone in the highest

Answer

The tax bracket range from 10 -37 % depending on the range of income of dffierent classes. It is aprogressive way of taxation and depend on growth of the individual .In tax bracket taxation system , lower income pay lower tax and higher income pay higher tax .If the utility of pre income is reduced by 10 % then it could be not beneficial to all as it maybe unfare for a group of classes in the country . As in tax bracket the range of income is divided and the taxation is based on that .But here , if the income of person who is earning very higher say 500 k $ if ended up losing all his/her money due to any circumstances and come to a low income then paying the amount of money can be difficult whihc is a fixed tax .In lower earning income if his income increaed from say $10k to $500 k then again he is paying the same amount of money as the lower income will giv. It can result in the loss of taxation revenue and end up loss of federal economy .Also , this approach is not progressive in nature .

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