Question

You are in charge of writing the tax law for a country that has five families. The country has a total taxable wage income this year of $250,000. In addition, households earned $25,000 in capital gains. The country's government needs to raise at least $50,000 for defense, schools, roads, and government salaries.

The following information is available for each of the five families:

Family 1: $10,000 income 3 children No investments/no capital gains Family

2: $25,000 income 0 children No investments/no capital gains

Family 3: $45,000 income 0 children No investments/no capital gains

Family 4: $70,000 income 1 child $5,000 additional income from capital gains

Family 5: $100,000 income 0 children $20,000 additional income from capital gains

Discuss the details of the tax law that you choose to enact and its effect on each of the five families.

Format: Part 1—a listing of your individual laws (no fancy law language needed; just a list describing exactly how you will tax your residents)

Part 2—a discussion about the reasoning behind why you chose your individual laws

Part 3—a calculation of how your laws affect each of the five families.

Answer 1

^{The objective of a sound taxation system should be to ensure an equitable tax burden on its citizens so that each citizen contributes according to his paying capacity. Simultaneously, a good and equitable taxation system also needs to ensure that the welfare of the citizens is not compromised and the citizen have a minimum basic and decent standard of living keeping into view the family size and the cost of living. The level of taxes levied should not make citizen face any hardship in maintaining a minimum basic standard of living. At the same time, the taxes should fenerate enough revenues to meet the requirement of the nation for its defence needs and other purposes such as education, roads,and expenses of the government for running the administraion.}

^{In the light of the above basic principles of a sound tax law system, I would, as the incharge for writing the tax law of the country, orose to suggest the following taxation system}

Part 1 : ^{Individual Laws Of Taxation:}

^{In order to ensure an equitable tax contribution from each citizen according to his/ her paying capacity, I propose the tax law as below:}

Income Slab Tax rate

^{Upto $. 5000 Nil}

^{5001 to 25000 10% on the income exceeding $. 5000}

^{25001 to 75000 15% on the income exceeding $. 5000}

^{50001 to 75000 20% on the income exceeding $. 5000}

^{75001 and above 30% on the income exceeding $. 5000}

Notes:

^{1. In addition to the above exemption of $ 5000, an additional rebate of $ 5000 per child will be granted from gross total income for the purpose of calculating the taxable income.}

^{2. Capital gains will be taxed at a modest rate of 4% for the reasons explained in Part 2}

Part 2 :

^{1. To maintain a minimum basic and decent standard of living, every citizen will be granted a basic deduction. It is assumed that an amount of $ 5000 would be sufficient for this purpose, Hence the income upto $ 5000 will be exempt from taxes and this amount shall be deducted from the gross total income to calculate the taxable income.}

^{2. Raising children involve an additional cost for a family and the citizens should be encouraged to have children. If there is no incentive for giving birth to children and for their raising well, the citizens could be discouraged from biving birth to children which will affect the future population of the country as is happening in Japan today. Today's children are tomorrow's workers and therefore, thhe future source of revenue for the country. Hence, I oropose to grant an exemption of $ 5000 per child from the gross total income to calculate the taxable income.}

^3. Capital gains arise from the investments of the citizens which are made from the income on which the citizens have already paid taxes. Hence it would not be fair and reasonable to levy a high rate of tax on capital gains as a high tax would disccourage citizens from making investments.Investments are necessary for economic growth of a country and tax on gains from them should be kept low to encourage citizens to invest. Hence, I propose to levy a tax on them at a modest rate of 6% only.

Part 3: Calculation of how my laws affect each of the five families (All figures in $):

Family Total income No. 0f Rebate Net Amount Deduct Exemption Limit Net taxable Tax Rate Total Tax Children For Children Income

1. 10000 3 15000 Nil NA     0 10% Nil

2. 25000 0 Nil 25000 5000 20000 10% 2000

3. 45000 0 Nil 45000 5000 40000 15% 6000

4. 70000 1 5000 65000 5000 60000 20% 12000

5. 100000    0 Nil 100000 5000 95000 30% 28500  

Total revenue generated excluding capital gains tax $48500

Tax on Total capital gains of citizens $25000 ($ 5000 + 20000) @ 6% $ 1500

Total tax revenue generated $ 50000

Final inmpact of my laws on income of each of the five families (All figures in $):

Family Total income* Net taxable Tax Capital Gains Tax on Total Tax Disposable

Income Capital Gains Income (Post-tax)

1. 10000 Nil Nil Nil Nil Nil 10000

2. 25000 20000 2000 Nil Nil 2000    23000

3. 45000 40000 6000 Nil Nil 6000     39000

4. 70000 60000 12000 5000 300 12300 57700

5. 100000 95000 28500 20000 1200 29700    90300

Total tax revenue 48500 1500 50000 * excluding Capital Gains

It can be easily seen from the chart above that the principles of a fair and equitale tax law system are applied in practice as each citizen is paying as per his paying capacity and a post=tax income necessary for maintaining a basic minimum standard of living is also ensured for every citizen.