Question

1. (2.5 points) The following table indicates the Federal Personal Income Tax Rates in 1989.

Income	Marginal Tax Rate	Taxes Paid
$0	0%
$1 -- $29,750	15%
$29,751 -- $71,900	28%
$71,901--$149,250	33%
Over $149,250	28%

1. (.5 points) Would you characterize this tax schedule as proportional, progressive, or regressive? Explain why.

2. (.5 points) Suppose a person earns $135,000 in 1989. Show in the table the taxes this person would pay in each income category.

3. (.5 points) Calculate the tax rate that measures this person’s actual tax burden.

4. (1 point) Does this tax system meet the requirements of horizontal equity? Explain. How about vertical equity? Explain.

1. (2 points) The Components of GDP (for 2013) in the following table were produced by the Bureau of Economic Analysis.

Category	Components of GDP (2013) (Billions of Dollars)
Consumer Spending
Durable Goods	$1,262.0
Nondurable Goods	2,622.9
Services	7,615.7
Private Investment Spending
Fixed Investment Spending (Nonresidential +         Residential)	2,564.0
Change in Private Inventories	106.1
Net Exports
Exports	2,259.9
Imports	2,757.2
Government Purchases of Goods, Services, and (Government) Investment Spending
Federal	1,245.9
National Defense	770.7
Nondefense	475.1
State and Local	1,879.6
GDP

1. (.5 points) Calculate 2013 Consumer Spending.   Calculate Private Investment Spending.

2. (.5 points) Calculate 2013 Net Exports and Government Purchases of Goods, Services, and (Government) Investment Spending.

3. (.5 points) Calculate GDP for 2013.

4. (.5 points) Calculate Consumption Spending as a percentage of GDP. Do the same for Investment, Net Exports and Government Purchases of Goods, Services, and Investment Spending.

Answer 1

1. The tax rate is progressive as it takes a higher percentage of Income from High-Income Earners. As we can see that the tax rate gradually increases as the income is increasing

2. For a person earning 135,000 in 1989, the tax division in each category is as follows:

a) 0 in the 1st tax category

b) 15% of 29,750 in 2nd category. This is equal to 0.15 x 29750 = 4462.5

c) 28% of 71,900 in 3rd category. This is equal to 0.28 x 71900 = 20132

d) 33% of (135,000 - (29750+71900)) in 4th category. This is equal to 0.33 x 33,350 = 11005.5

e) Since no money left to be taxed, therefore 0 tax in 4th category.

Income	Marginal Tax Rate	Taxes Paid
$0	0%	0
$1 -- $29,750	15%	4462.5
$29,751 -- $71,900	28%	20132
$71,901--$149,250	33%	11005..5
Over $149,250	28%	0

  

3. Total tax given = 0 + 4462.5 + 20132 + 11005.5 + 0 = 35600.

$\therefore Overall Tax percentage = \frac{35600}{135000} \times 100$

= 26.37%

4. No, this system does not meet the horizontal equity conditions as horizontal equity states that people under the same income bracket shall be charged with the same rate of tax.

This system is a classic example of vertical equity as it says that people with higher wealth and income shall be charged with a higher tax rate.

Part B

1. The total consumer spending = Durable Goods + Nondurable Goods + Services = 1262.0 + 2622.9 + 7615.7

= 11500.6

The PRIVATE investment spending = Fixed Investment Spending (Nonresidential + Residential) + Change in Private Inventories = 2,564.0 + 106.1

= 2670.1

2. Net Exports = Exports - Imports = 2,259.9 - 2,757.2 = - 497.3

Net export is negative

Government spending =  Federal + National Defense + Nondefense + State and Local

= 1,245.9 + 770.7 + 475.1 + 1,879.6

= 4371. 3

3. GDP for 2013 = total consumer spending + PRIVATE investment spending + Net Exports + Government spending

= 11500.6 + 2670.1 - 497.3 + 4371. 3

= 18044.7

4. Consumption spending as a percentage of GDP = (11500.6 / 18044.7) x 100 = 60.99%

PRIVATE investment spending as a percentage of GDP = ( 2670.1 / 18044.7) x 100 = 14.80%

Net Exports as a percentage of GDP = (497.3/ 18044.7) x 100 = - 2.76 %

Government spending as a percentage of GDP = (4371. 3 / 18044.7) x 100 = 24.22 %