Chapter 18: Q1. The nation of Fishkasar has a tax rate of 10% on the first 20,00

Question

Chapter 18: Q1. The nation of Fishkasar has a tax rate of 10% on the first 20,000 walops (the national currency) of taxable income, then 25% on the next 30,000 walops, then 50% on all taxable income above 50,000 walops. Fishkasar provides a 4,000-walop exemption per family member.

a. Jamil’s family has three members and earns 50,000 walops per year. Calculate the family’s marginal and average tax rates.

b. Boba’s family has five members and earns 85,000 walops per year. Calculate the family’s marginal and average tax rates.

c. Suppose that Fishkasar changed its tax code to a flat tax of 30% with an 8,000- walop per family member exemption. Would this change in the tax system make the system more progressive, more regressive, or neither?

Explanation / Answer

(a) The taxable income of Jamil’s family = $50,000 (before exemption)

   4,000-walop exemption per family member means 3 member will get $12000 as exemption.

Then, taxable income = $50,000 - $12,000 = $38,000

Since this is between 20,000 and 50,000, Jamil's family faces a 25% marginal tax rate.

To compute the average tax rate, we have to compute the total tax liability.

The first 20,000 of taxable income is taxed at 10%. The next 18,000 is taxed at 25%.

Thus the total tax = (0.1 ×20,000) + (0.25 × 18,000) = 2,000 + 4,500 = 6,500.

The average tax rate =   (6,500/50,000) * 100 = 13%

(b) Boba’s family’s taxable income = 85,000 – (5 × 4,000) = 65,000. This is greater than 50,000, so the family is in the 50% marginal tax bracket.

The family’s total tax liability = (0.1 × 20,000) + (0.25 × 30,000) + (0.5 × 15,000) = 17,000.

Its average tax rate = (17,000/85,000) * 100 = 20%

(c) The flat 30% marginal rate structure is not progressive at all: any two families with positive taxable income will face the same marginal tax rate, regardless of their income. On the other hand, the increase in the per-family-member exemption tends to make the average rates more progressive.

For example, consider two single-member households with incomes of 8,000 and 16,000 walops, respectively. Under the old system, the first would have an average tax rate of 400/8,000 = 5% and the second would have an average tax rate of 1200/16,000 = 7.5%, so the tax is system was slightly progressive in this income range.

Under the new system, the first would have no tax liability and hence a 0% average tax rate; the second would have an average tax rate of 30% × 8000/16,000 = 15%. So the new system is more progressive in this income range.

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