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The way by which the tax structure affects the decision of a person to immigrate into the nation or emigrate out of the nation. And the reasoning applied, if ocean or rivers separates the two countries.
Introduction:
Marginal income tax rate: It is defined as the amount of tax which is paid on every external dollar of income. When the income rises, the marginal tax rate of a person also rises. This means that the person with low income are taxed low and those with high income are taxed high.
Federal income tax rate: It is a type of progressive tax which is imposed by the federal government, states, and the local body in the United States. This means that as the income increases, the tax rate also increases.
Explanation:
Country A:
Given,
The yearly income is $40,000.
Tax rate is 20%.
The formula to calculate tax bill is,
Substitute 20% for tax rate and $40,000 for yearly income.
Tax bill of person earning $100,000 is,
The formula to calculate tax bill is,
Substitute 20% for tax rate and $100,000 for yearly income.
Country B:
Given,
The yearly income is $40,000.
Tax rate is 10%.
The formula to calculate tax bill is,
Substitute 10% for tax rate and $40,000 for yearly income.
Tax bill of person earning $40,000 at 10% tax rate and $60,000 at 40% tax rate is,
The formula to calculate tax bill is,
Substitute 10% for tax rate 1, 40% for tax rate 2.
- Thus, the tax bill in country A with $40,000 or less income is more than the tax bill in country B with same income. The tax bill in country A with $100,000 or more income is less in country A as compared to B with the same income.
- If the language, culture and climates of the country are same and if an individual can choose to live on one side or the other side of a river separating the two countries, then the person with a yearly income of more than $40,000 will choose to live in country A because the taxes charged there are less as compared to country B.
- On the other hand, one with less than $40,000 income will choose to live in country B as compared to country A.
- If instead of river,even an ocean would have divided the two countries, then the result would remain the same. The person with yearly income of more than $40,000 will choose to live in country A because the taxes charged are less as compared to country B. On the other hand, one with less than $40,000 income will choose to live in country B as compared to country A.
- Migrating to another country incurs time, cost like transportation, and finding a home to live. These costs are fixed and once the person gets settled, there would be no additional cost.
- If the language, culture, and the climates of the countries are different, then there is no chance of migration. It is very difficult to settle in a place that has different culture, language, and climate because along with migration cost there is an external social cost. Hence, an individual would not migrate, as the social cost is more important than monetary cost.
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Chapter 14 Solutions
EBK ECONOMICS OF PUBLIC ISSUES
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