Question

6. Suppose that Freedonia decides to simplify its tax system (from that in question 5). Now

there is a at tax rate of 25%, and per family deduction is raised to 19,000 pesos (from 12,000

pesos), and there is no child tax credit anymore. Martin's and Diego's family situation as

well as their gross income is the same as in question 5.

(a) How much tax does Martin's family pay now? What is its average tax rate?

(b) How much tax does Diego's family pay now? What is its average tax rate?

(c) How much does the government total tax revenue from these two families dier from

that under the original tax system?

(d) Is the new system more progressive, more regressive, or neither comparing to the

original tax system in question 5? Explain. Note that you need to consider other

people in addition to those like Martine's and Diego's family, e.g., the very poor.

Show the detail of your computation.

5. In Freedonia, the tax brackets works as follows.

On the rst 20,000 pesos of taxable income, tax rate is 10%.

On the portion of income from 20,000 to 50,000 pesos, the tax rate is 25%.

On income above 50,000 pesos, the tax rate is 50%.

In addition, each family has a 12,000 pesos deduction, and each child can claim 2,000 pesos

of tax credit.

(a) Martin has a wife and a kid, and the family gross income is 50,000 pesos per year.

(i) What is the family's marginal tax rate?

(ii) How much tax does the family pay? What is its average tax rate?

(b) Diego has a wife and three kids, and the family gross income is 100,000 pesos per year.

(i) What is the family's marginal tax rate?

(ii) How much tax does the family pay? What is its average tax rate?

Answer 1

	5
		Gross Income	50,000	pesos
		Tax deduction	12,000	pesos
		Taxable Income	38,000	pesos	(50000-12000)
	i)	Marginal Tax Rate	25%	(Rate at income bracket of 20,000 to50,000pesos)
	ii)	Calculation of taxes payable:
	a	On the first 20,000 peso taxable income	2,000	pesos	(20000*0.1)
	b	On the balance taxable income	4,500	pesos	(38000-20000)*0.25
	c	Tax Credit for the kid	2,000	pesos
	d=a+b-c	Taxes payable by the family	4,500	pesos
	e=d/38000	Average tax rate	11.84%
	b)
	(i)	Gross Income	100,000	pesos
		Tax deduction	12,000	pesos
		Taxable Income	88,000	pesos	(100000-12000)
		Marginal Tax Rate	50%	(Rate at income above 50,000pesos)
	ii)	Calculation of taxes payable:
	a	On the first 20,000 peso taxable income	2,000	pesos	(20000*0.1)
	b	On the incomefrom20000 to50000pesos	7,500	pesos	(50000-20000)*0.25
	c	On the balance taxable income	19,000	pesos	(88000-50000)*0.5
	d	Tax Credit for the kids	6,000	pesos	(2000*3)
	e=a+b+c-d	Taxes payable by the family	22,500	pesos
	f=e/88000	Average tax rate	25.57%
	6
	(a)	Calculation of tax for Martin'sFamily
		Gross Income	50,000	pesos
		Tax deduction	19,000	pesos
		Taxable Income	31,000	pesos	(50000-19000)
	a	Taxes payable by the family	7,750	pesos	(31000*0.25)
	b=a/31000	Average tax rate	25.00%
	(b)	Calculation of tax for Diego'sFamily
		Gross Income	100,000	pesos
		Tax deduction	19,000	pesos
		Taxable Income	81,000	pesos	(100000-19000)
	a	Taxes payable by the family	20,250	pesos	(81000*0.25)
	b=a/81000	Average tax rate	25.00%
	.(c)	Total Tax Revenue	28,000	pesos	(7750+20250)
		Total Tax Revene Before	27,000	pesos	(4500+22500)
		Increase of revenue by	1,000