Question

a) Suppose that a provincial government collects income tax revenues using a linear income tax schedule. A taxpayer who has a zero income in a given year receives a $500 as a living allowance from the government. If a taxpayer who has an annual income of $30,000 pays $4000 in taxes, what is the marginal tax rate? Draw the linear income tax schedule on a diagram. Is the tax schedule regressive?

b) Using a simple economic model, explain the factors that will reduce the level of tax evasion. Use a suitable diagram(s) to illustrate. Briefly discuss the strengths and shortcomings of the model.

Answer 1

a TEC+ ty Y =0 ginen COTE-500 t = income tax rate y = income T= tax collected c = Autono mous tax - 500 = c + txo C =-500 T= -500tt ty T= 4000 for Y = 30000 9000 =-500 + + x 30 000 0.15 (income tax rate) 20 4500 t = 30 Doa 3oooo t = 15% not it is progressine esine in nature regressive tax increases with increase in income. bcor

some sane their ete. Tz let the Ya better estimation of income f 3 some people misleading to gove about their actual to reduce their tax & it leads to corroeption ete- smugiers also do their their business by illegal al means to taxes T a person has Te income Ya but ne shows only Yz in sheet of then gou pays only Ty ten Ya which i lower his actual tax Tz. So, to avoid this we prefers privitaigation of tax which means the tax show or private properties consumption that income not be misleading or for for be resed consumption hence it buying private property i less. of manceplating the income ne pays Y then kind of things om bcoz income can some gines the change