## [answered] Assignment: Tax and Income Distribution 1. Consider the fol

Microeconomics Assignment:

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Assignment: Tax and Income Distribution

1. Consider the following data on income distribution from two years:

First 20% 2nd 20% 3rd 20% 4th 20% Top 20% 1990 3.7% 1980 4.1% 12.0%

9.7% 16.1% 22.3%

15.4% 27.5% 45.9%

43.3% A. Plot these points and draw a Lorenz curve for each of these two years. As a

reference, include a Lorenz curve in which all quintiles earn the same amount of income. Label

B. What happened to the share of income earned by the poorest quintile between 1980 and

1990? (3 points)

C. What happened to the share of income earned by the richest quintile between 1980 and

1990? (3 points)

D. What happened to the second and third quintiles between 1980 and 1990? (1 point)

E. In your opinion, did income distribution become more or less equitable between 1980 to

1990? (1 point)

2. Income distribution tells only part of the story of how well off a household is. Wealth, a

measure of a household?s well being, includes things like the assets the household own and the

possession of human capital, which can increase a household?s earning potential. Considering

the three households below, who have the same annual income,

answer the following questions using only the information given.

I. A seventeen-year old high school dropout with no financial assets

II. A married couple with a large debt and small incomes who are in their final semester of law

school

III. A retired couple who invested a lot of money while they were working and now have large

financial assets

A. How does the wealth of these three households differ? (3 points)

B. If all income is taxed at a flat rate of 10%, how would the amount of tax paid differ between

these three households?(3 points)

C. If, instead, a tax was placed on wealth (everything the family owned) how would the

amount of tax paid differ between these three families? (3 points)

3. Consider the following income tax system. A person pays no tax on the first \$10,000 of

income and then pays a tax rate of 20% on all additional income.

A. Calculate the amount of tax paid by a person with an income of \$20,000. (3points)

B. Calculate the amount of tax paid by a person with an income of \$100,000. (3 points)

C. Is this a progressive, regressive, or proportional tax? Explain. (4 points)

D. Imagine that you want to change this tax system to make the distribution of after-tax

income (what people have to spend after paying their taxes) more equitable. Explain how you

might do this without changing the total amount of money the government collects and offer

an example. (2 points) 4. The amount a household spends in a year depends, in part, on their income. Consider the

following data for four households (and be sure to complete the last two columns):

Household

inome

A

B

C

D Income

\$12,000

\$25,000

\$50,000

\$100,000 Spending \$12,000

\$23,000

\$40,000

\$75,000 _______ Tax Paid

_______

_______

_______ Tax as a % of ________________

________________

________________

________________ A. Calculate the amount each household will pay in taxes if a 12% sales tax is applied to all

spending. (2 points)

B. Calculate the tax as a percent of income that each household will pay in this case. (2

points)

C. Based on these four households, is this a progressive tax? Explain. (4 points)

D. Generally, a sales tax is rarely applied to such things as food and rent. Explain why these

exceptions make sales taxes more progressive. (4 points)

5. Automobiles are taxed in many different ways. Revenues from automobile taxes are

typically used for road building and maintenance. For each of the following automobile taxes,

explain why it?s most clearly an example of the benefit principle of taxation or an example of

the ability to pay principle of taxation. If the answer is more ambiguous than that, explain why.

A. A tax on each gallon gasoline purchased (4 points)

B. An annual registration fee based on the value of the automobile (4 points)

C. An annual registration fee based on the number of miles the car has been driven in the past

year (4 points)

D. An annual licensing fee of \$50 per automobile (4 points)

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