Question

Instruction: Write the final answer in the space provided. Attach separate sheets showing your work to find the final answer 1. Suppose the Adjusted Gross Income for Lloyd is $75.000 and $80,000 for Gertrude. Use the information provided in Table 1 to answer the questions that follow Table 1 Tax Bracket Single Married Filing Jointly 10% Bracket so - $8.500 S - $17,000 15% Bracket $8,500 - $34,500 $17,000 - $69,000 25% Bracket $34,500 - $83,600 $69.000 - $139,350 28% Bracket $83.600 – $174,400 $139 350 - $212,300 36% Bracket $174,400 - $379,150 $212,300 - $379,150 39.6% Bracket $379,150+ $379,150+ What is the total tax liability for Lloyd? b. What is the average tax rate paid by Lloyd? c. What is the total tax liability for Gertrude? d. What is the average tax rate paid by Gertrude? e. Why do the average tax rates differ? 2. The Congressional Budget Office has estimated that Aggregate Demand needs to increase $5 billion for the economy to attain "full employment". If the marginal propensity to consume is 0.60 2. Calculate the value of the spending multiplier. b. Calculate the initial change of government spending needed to attain full employment c. Calculate the value of the tax multiplier? d. Calculate the change in tax needed to attain full employment

help please

Answer 1

1. The tax liabilities will be calculated in slabs. For example, Lloyd will only need to pay 10% tax on first 8500 of income. Out of the rest 66500 of income, he will pay 15% on 26000 (this is derived from 34500-8500). This will leave 40500 of his income. Since next slab is till 83600, he will pay 25% tax on all of his rest of 40500. The table below will explain better

Tax Rate 10% 15% Slab Range 8500 8501-34500 34501-83600 83601-174400 174401-379150 >379150 Slab size (To minus from) 8500 26000 49100 90800 204750 28% 36% 39.6%

Continuing, now we can calculate the absolute amount of tax paid in each slab. And then the total. For example. Lloyd will pay 10% tax on 8500, which is 850. Then he will pay 15% on next 26000, which is 3900. Finally, he will pay 25% on rest 40500 of his salary, which is 10125. So total tax paid by him=850+3900+10125=14875. This has been calculated for both Lloyd and Gertrude below.

Tax Rate 10% 15% 25% Total Amount of Salary in the slab Llyod Gertrude 8500 8500 26000 26000 40500 45500 75000 80000 Tax Paid (amount in the slab*tax rate) Llyod Gertrude 850 850 3900 3900 10125 11375 14875 16125

Average tax liability can be calculated by=total tax paid/total income. Now we can fill blanks a,b,c and d.

1a. 14875.
1b. 14875/75000=19.83%.
1c. 16125.
1d. 16125/80000=20.16%.
1e. The average tax rates differ because a higher portion of Gertrude's salary lies in the higher tax bucket of 25%. This is an example of progressive taxation.

2. Lets first see what Marginal Propensity to Consume (MPC) is. It is basically the amount someone will spend when he she gets extra income. So if I get 100 dollars and I spend 60 of those, my MPC is .6. The rest I save, which is called Marginal Propensity of Saving (MPS).

Now lets see what a spending multiplier is. As the government injects money into the system, someone will use the money to spend. Lets say the person gets 100 dollars and spends 60. This will be someone else's income. Then that person will use the 36 out of that 60 to buy something else. That is the third person's income. He will again spend 60% of that 36 and so on. This effect is called multiplier effect.

Now lets calculate the answers.

2a. Spending multiplier is given by= 1/(1-MPC). MPC is .6, so multiplier=1/1-.6=1/.4=2.5
2b. Government needs 5 billion dollars for the economy to be in full employment. But since we have the multiplier of 2.5, the government actually only needs 5/2.5=2 billion dollars of initial change.
2c. A tax multiplier is given by -MPC/MPS. Our MPC is .6 and MPS is .4 So, tax multiplier=-.6/.4=-1.5.
2d. The government needs to increase the spending by a total of 5 billion to attain full employment. Since the tax multiplier is -1.5, the government needs to reduce taxes by 5/-1.5=-3.33 billion.