The regressive tax system and its redistribution.

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Chapter 20, Problem 12DQ

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The regressive tax system and its redistribution.

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4. Suppose that there are two households in the economy, A and B, that they face the same wage rate w, and that the government initially uses a proportional income tax according to which each household must pay a fraction t of its labor income as income tax. Assume that given this tax scheme household A chooses to work full time while household B chooses to work part time. Now suppose that the government is interesting in studying the impact of changing the tax system to a progressive tax system where the household work- ing full time would pay a tax rate th >t while the household working part time would pay a rate ti < t. (a) Draw a graph of the impact of this change on the budget constraint that households face with the two different tax systems. (b) What would such a change in the tax system imply for the optimal choice of the two households?

1. Suppose the marginal or bracket tax rate for income from $1 to $15,000 is 12%, the marginal tax rate for income between $15,001 and $30,000 is 20%, and the marginal tax rate for income between $30,001 and $50,000 is 25%. How much in taxes would someone with a $40,000 income pay? Is this tax system progressive, regressive, or proportional? Why?

4.7) Consider a national income tax that is structured as follows: Income Marginal tax rate $0-$10,000 0% $10,001-- $60,000 5% $60,001and above 0% For each of the following workers determine his or her marginal and average tax rate d. Would you describe the tax system as proportional, regressive, or progressive? Explain