Question

Assume Ghana operates a 5-bracket annual income tax system that attracts tax rates of 0% for the first GHS 3828, 5% for the next GHS 1200, 10% for the next GHS 1440, 17.5% for the next GHS 36000, and 25% for any remaining amount. Mr. Mustapha makes GHS 90,000 per year, and has a wife and 2 children. The Government gives a tax exemption/deduction of GHS1500 per family member. Find the following i. Statutory marginal tax rate ii. Effective marginal tax rate iii. Taxable income iv. Total taxes, and v. Effective average tax rate. b) Government decides to move to a flat tax rate of 20%, keeping the GHS 1500 per family member exemption. Does Mr. Mustapha’s family benefit from the new tax system? c) Rather than implementing the flat tax system, government now decides to keep the income tax schedule described first (a), but instead of providing a GHS 1500 exemption per family member, introduces a 1500 tax credit per family member. Which of these two tax regimes will benefit Mr. Mustapha’s family more? Is the tax credit more expensive for government than the tax exemption? Why?

Answer 1

1. Calculation for the question is as under

Income	90000
Less Family Member Exemption	4500
(GHS 1500 * 3)
Taxable Income	85500

Tax Calculation
Income	Rate	Tax Amount
3828	0	0
1200	5%	60
1440	10%	144
36000	17.50%	6300
43032	25%	10758
	Total	17262

i) Statutory Marginal Tax rate applicable Mr. Mustapha will be 25% slab. (Statutory Marginal Tax is the maximum tax rate applicable to the person).

ii) Effective Marginal Tax Rate of Mr. Mustapha will be 20.19% (it is calculated based on the total tax payable divided by the taxable income).

iii) Taxable income of Mr. Mustapha is GHS 85500.

iv) Total Taxes Payable by Mr. Mustapha GHS 17262.

v) Effective Average Tax Rate of Mr. Mustapha will be 19.18% (it is calculated based on the total tax payable divided by the income earned by the person).

2. If Government decides to move to a flat tax rate of 20%, keeping the GHS 1500 per family member exemption, then tax will be calculated as under:

Income	90000
Less Family Member Exemption	4500
(GHS 1500 * 3)
Taxable Income	85500
Tax @20% flat	17100

Therefore in this situation, Mr. Mustapha’s family will be benefitted by reduction in tax by (GHS 17262 - GHS 17100) i.e. GHS 162.

3. If Rather than implementing the flat tax system, government now decides to keep the income tax schedule described first (a), but instead of providing a GHS 1500 exemption per family member, introduces a 1500 tax credit per family member.

Tax Will be Calculated as under:

Income	90000
Less Deduction	0
Taxable Income	90000

Tax Calculation
Income	Rate	Tax Amount
3828	0	0
1200	5%	60
1440	10%	144
36000	17.50%	6300
47532	25%	11883
	Total Tax	18387
Less: Tax credit for Family Members	(1500 * 3)	4500
	Net Tax	13887

This regime of government to keep the income tax schedule described first (a), and providing a 1500 tax credit per family member will be more beneficial for Mr Mustafa’s Family as there will be lowest tax payable by them.

Since there will be the least tax collected by the government in the third regime, therefore giving tax credit of GHS 1500 per family member will be more expensive as compared to the tax exemption/deduction of it will be the GHS 1500 per family member.