Fiscal Policy: Calculating Tax Revenues
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this is a fiscal case study. I copy and paste two links which are the case study with the questions and everything you need to follow in order to complete the paper and the other link is just additional information.
Please, copy and paste the links so you can see what are the questions and instructions to follow.
HERE IS THE FIRST LINK WHICH IS THE MAIN ONE IN WHICH THE QUESTIONS TO RESPOND TO ARE:
https://www(dot)smore(dot)com/3xhj0
HERE IS THE SECOND LINK JUST FOR ADDITIONAL INFORMATION:
https://docs(dot)google(dot)com/document/d/1cQMh3kRF7_ZEVBn9u2H0iySH73nsScyAdYZ7fO6QSZ4/edit
SCENARIO INTRODUCTION
Use the information provided below to complete the questions. Total points = 100.
Suppose a small economy has two income tax rates: 15% for all income up to $50,000 and 30% for any income earned above $50,000. Suppose that the economy has a Government Budget for this year (year 1) of $58,500, and a total of five individuals earning the following income: Amy $20,000, Betty $40,000, Charlie $60,000, Dimitry $80,000, Evelyn $100,000. In chapter 5 we saw that GDP can be calculated in two ways, via the expenditure approach or the income approach, and that when the income approach is used, there must be adjustments made to National Income, specifically adding the Consumption of Fixed Capital and a Statistical Discrepancy. For the sake of simplicity, let's imagine that National Income is equal to GDP, in other words the Fixed Capital and the Statistical Discrepancy are equal to zero.
CALCULATING TAX REVENUES - YEAR 1
1. Calculate the Total Tax Revenues. a) what would be the total tax revenue paid by each of the five citizens? b) what is the total tax revenue for the small nation? (16 points)
2. What is the small Nation's Income in year 1? (6 points)
3. What percent of the Nation's Income does the Total Tax Revenue represent? (6 points)
4. In year 1, does the economy have a balanced budget, a budget surplus, or a budget deficit. Accompany your response with the corresponding dollar amount. (6 points)
CALCULATING TAX REVENUES - YEAR 2
5. Now assume that a recession (triggered by a reduction of Aggregate Demand) causes each of the five incomes to fall by 25%. In other words, income is 75% of what they used to be. Given the lower income, a) what would be the total tax revenue paid by each of the five citizens? b) what is the total tax revenue for the small nation? (18 points)
6. What is the Nation's Income in year 2? (6 points)
7. In year 2, what percent of the Nation's Income does the Total Tax Revenue represent? (6 points
8. Suppose that the Government Budget remained the same in year 2. Is the economy experiencing a balanced budget, a budget surplus, or a budget deficit, in year 2? Accompany your response with the corresponding dollar amount. (6 points)
PUTTING IT ALL TOGETHER - PART 3
9. Using the answers for part 1 and part 2. Explain how this progressive tax structure (15% and 30% tax brackets) acts as an automatic stabilizer. (10 points
10. Using the answers for part 1 and part 2. What is the size of the recessionary Gap? In other words, what is the dollar value of the GDP that is being lost (not produced) because of the recession? (10 points)
11. Assuming a Marginal Propensity to Save (MPS) of 20% or 0.20, use the Keynesian Multiplier to determine the additional amount of government spending required. (10 points)
Tax rate:
15% of income up to $50,000,30% on any income above $50,000Government budget = $58,500
1 Year 1 Total Tax Revenues = $58,500
* Total tax revenue paid by each of the five citizens
Amy = 20,000*15% = $3000Betty = 40,000*15% = $6000Charlie = (50,000*15%)+(10,000*30%) = $10,500Dimitry = (50,000*15%)+(30,000*30%) = $16,500Evelyn = (50,000*15%)+(50,000*30%) = $22,500
* Total tax revenue for the small nation
3000 + 6000 + 10,500+ 16,500 + 22,500 = $58,500
2 The small nation’s income in year 1 = (individual income - tax) + tax revenue
= (20,000 - 3000) + (40,000 - 6000) + (60,000 - 10,500) + (80,000-16,500) + (100,000-22,500) + 58,500
= $300,000
3 What percentage of the Nation’s income does the Total Tax Revenue represent?
Ratio of tax revenue = tax revenue/ total income
= 58,500/ 300,000 = 19.5%
4 In year 1, the economy has a balanced budget. This is because the government’s $58,500 budget is entirely funded by the exact $58,500 tax revenue amount.
Year 1 Tax Worksheet
Person
Year 1 Income
Income taxed at 15%
Income taxed at 30%
Total Tax Paid
Amy
$20,000
$20,000
0
$3,000
Betty
$40,000
$40,000
0
$6,000
Charlie
$60,000
$50,000
$10,000
$10,500
Dimitry
$80,000
$50,000
$30,000
$16,500
Evelyn
$100,000
$50,000
$50,000
$22,500
Year 1 Total Tax Revenue =
$58,500
CALCULATING TAX REVENUES FOR YEAR 2
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