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# Exercises

Exercises. Econ 304 Chapter 12. Do you know …. how to analyze a tax system? the different tax systems? why the current tax system is discouraging saving? what a marriage tax is?. 1a. How to analyze a tax system?. Given the following tax table Answer the questions below. Télécharger la présentation ## Exercises

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1. CRC Economics

2. Exercises Econ 304 Chapter 12 CRC Economics

3. Do you know … • how to analyze a tax system? • the different tax systems? • why the current tax system is discouraging saving? • what a marriage tax is? CRC Economics

4. 1a. How to analyze a tax system? • Given the following tax table • Answer the questions below. CRC Economics

5. Questions to answer Suppose that Y = \$75,000. How much are total taxes (T)? Total taxes (T) = Tax on income below \$50,000 + Tax on income over \$50,000 T = (\$50,000*20%) + (\$25,000*40%) = \$20,000 CRC Economics

6. Questions to answer How much is the average tax rate (atr)? atr = T / Y atr = \$20,000 / \$75,000 = 27% i.e. on the average, the tax payment is 27 cents per dollar. CRC Economics

7. Questions to answer How much is the marginal tax rate (mtr)? mtr = DT / DY mtr = \$10,000 / \$25,000 = 40% i.e. the extra tax is 40 cents per extra dollar on income over \$50,000. CRC Economics

8. Questions to answer Does this tax system increase or reduce efficiency? The higher the mtr, the less efficient a tax system is.People have to pay more tax on extra income, they work less. mtr = 40% > atr = 27%. This tax system reduces efficiency. CRC Economics

9. Questions to answer Does this tax system increase or reduce equity? The higher the mtr, the more tax is collected. The government has more money to help the poor. mtr = 40% > atr = 27%. This tax system increases equity. CRC Economics

10. 1b. How to analyze a tax system? • Given the following tax table, where LS = lump sum • Answer the questions below. CRC Economics

11. Questions to answer Given two levels of income Y, fill in the blank boxes below. Y T atr mtr \$20,000 \$4,000 20% 0% \$40,000 \$4,000 10% 0% CRC Economics

12. Questions to answer Y T atr mtr \$20,000 \$4,000 20% 0% \$40,000 \$4,000 10% 0% Does this tax system increase or reduce efficiency? This tax system increases efficiency. In fact, it is the most efficient system, because mtr = 0% CRC Economics

13. Questions to answer Y T atr mtr \$20,000 \$4,000 20% 0% \$40,000 \$4,000 10% 0% Does this tax system increase or reduce equity? This tax system reduces equity. In fact, it is the least equitable system, because (1) the poor pay the same tax as the rich, and (2) the government will not have enough tax revenues to help the poor. CRC Economics

14. 2. Different tax systems • Given the following tax table • Answer the questions below. CRC Economics

15. Questions to answer What are the atr’s under the proportional tax system? 25% , 25%, and 25%. What does that imply? Under the proportional tax system, the same tax rate applies to all income levels. CRC Economics

16. Questions to answer What are the atr’s under the regressive tax system? 30% , 25%, and 20%. What does that imply? Under the regressive tax system, the tax rate falls as income rises. CRC Economics

17. Questions to answer What are the atr’s under the progressive tax system? 20% , 25%, and 30%. What does that imply? Under the progressive tax system, the tax rate rises as income rises. CRC Economics

18. Questions to answer Which system increases efficiency the most? The regressive system. Which system increases equity the most? The progressive system. What is the U.S. income tax system, proportional, regressive, or progressive? CRC Economics

19. 3. Why does the current U.S. income tax system discourage saving? • Given the following tax table • Answer the questions below. CRC Economics

20. Questions to answer Suppose that there is no income tax on saving, what is the future value of \$100 saving for 40 years (65-25) at 8% return per year? FV = PV(1+i) n = \$100(1+8%)40 = \$2,172 How much is the effective rate of interest (i)? i = 8% CRC Economics

21. Questions to answer Suppose that the tax rate on saving is 25%, what is the future value of \$100 saving for 40 years (65-25) at 8% return per year? FV = PV(1+i) n = \$100(1+8%(1-25%))40 = \$1,029 How much is the effective rate of interest (i)? i = 6% CRC Economics

22. Questions to answer What does that imply? The current U.S. tax system taxes the returns on saving, thus reducing the effective rate of interest and reducing people’s incentive to save. CRC Economics

23. Questions to answer What if we remove that tax and replace it with a consumption tax? Then people will have more money at the end. They have the incentive to save more. This will be good for the economy in the long run. As more money is saved, more money will be invested. That means the U.S. economy will have more means to produce more goods and services. The economy will grow more. CRC Economics

24. 3. What is a marriage tax? • Given the following tax table • Answer the questions below. CRC Economics

25. Questions to answer How much is the tax paid by Sam & Sally before marriage?After marriage? Before marriage T = \$90,000 * 25% = \$22,500. After marriage T = \$22,500. CRC Economics

26. Questions to answer How much is the tax paid by John & Joan before marriage?After marriage? Before marriage T = \$80,000 * 25% = \$20,000. After marriage T = \$22,500. CRC Economics

27. Questions to answer What happens? Sam, who does not work, and Sally pay the same amount of tax both before and after marriage. John and Joan, both working, by getting married, pay more tax. The tax law penalizes married couples, who both work, with a marriage tax. Was there any changes in the tax law about the issue? The tax law was changed to include some adjustments to the issue of marriage tax. CRC Economics

28. Now you know … • how to analyze a tax system. • the different tax systems. • why the current tax system is discouraging saving. • what a marriage tax is. CRC Economics

29. See You! Take Care! CRC Economics

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