4. (35 points) Assume that the mayor of your city is concerned about the property tax burden on households. She has asked you to analyze two proposals: (a) A homestead exemption of $10,000 on assessed value of owner-occupied residential property. (b) A circuit breaker, which is a credit for high property tax burdens on the state income tax. The circuit breaker credit CB is equal to t-b. I where t is property tax payment, I is the income, b is the share of income considered to be a high property tax burden. When actual property tax payment t exceeds the acceptable property tax burden b. I, the difference is the income tax credit. If b.I > t then the credit is set equal to zero. The property tax burden parameter b is equal to 7% if household income is below $20,000; it is 8% if household income is between $20,000 and $30,000; it is 9% if household income is between $30,000 and $40,000, and it is 10% for household income is above $40,000. The mayor has asked you to compare the impact on three typical households: The household size is identical in all Low-income Low-income Middle-income Renter Homeowner Homeowner Income Ownership Household income Actual market value of property Estimated market value of property Assessed value of property $15,000 $60,000 $60,000 $30,000 $15,000 $60,000 $60,000 $30,000 $50,000 $150,000 $100,000 $50,000 Table 2: Property Tax Evaluation. Note that the market value of an apartment is what it would sell for as a condominium. three cases. The property tax is 5% of assessed value of property. Assume all property taxes on rental property are passed onto the renter. The state has a flat income tax with a rate of 8% on all taxable income. For simplicity, you can assume that taxable income equals total household income. Use the above information to answer the following questions (You must show all your work in Microsoft Excel). (a) Calculate the property taxes paid by each household and the two types of "effective tax rates," i.e., property taxes divided by gross (before tax) income and property taxes divided by actual market value of homes, for the following four cases: i. The present system without the homestead exemption or circuit breaker. ii. With the homestead exemption of $10,000. iii. With the circuit breaker. Assume that renters and homeowners are eligible for the circuit breaker and that the circuit breaker is refundable, that is, if the amount of the income tax credit provided by the circuit breaker exceeds the amount a taxpayer owes in income taxes, then the taxpayer receives a check for the difference between the amount of the credit and the amount of taxes owed. In calculating the property taxes, subtract the circuit breaker credit from property taxes calculated in part (i). (b) Compare the impact of these two proposals on horizontal and vertical equity relative to the present system. For your calculations, assume each proposal is implemented independently. For example, the circuit breaker is implemented without the homestead exemption. (c) Based on all the criteria of tax evaluation (equity, efficiency, adequacy, and feasibility), which proposal would you recommend and why? 4. (35 points) Assume that the mayor of your city is concerned about the property tax burden on households. She has asked you to analyze two proposals: (a) A homestead exemption of $10,000 on assessed value of owner-occupied residential property. (b) A circuit breaker, which is a credit for high property tax burdens on the state income tax. The circuit breaker credit CB is equal to t-b. I where t is property tax payment, I is the income, b is the share of income considered to be a high property tax burden. When actual property tax payment t exceeds the acceptable property tax burden b. I, the difference is the income tax credit. If b.I > t then the credit is set equal to zero. The property tax burden parameter b is equal to 7% if household income is below $20,000; it is 8% if household income is between $20,000 and $30,000; it is 9% if household income is between $30,000 and $40,000, and it is 10% for household income is above $40,000. The mayor has asked you to compare the impact on three typical households: The household size is identical in all Low-income Low-income Middle-income Renter Homeowner Homeowner Income Ownership Household income Actual market value of property Estimated market value of property Assessed value of property $15,000 $60,000 $60,000 $30,000 $15,000 $60,000 $60,000 $30,000 $50,000 $150,000 $100,000 $50,000 Table 2: Property Tax Evaluation. Note that the market value of an apartment is what it would sell for as a condominium. three cases. The property tax is 5% of assessed value of property. Assume all property taxes on rental property are passed onto the renter. The state has a flat income tax with a rate of 8% on all taxable income. For simplicity, you can assume that taxable income equals total household income. Use the above information to answer the following questions (You must show all your work in Microsoft Excel). (a) Calculate the property taxes paid by each household and the two types of "effective tax rates," i.e., property taxes divided by gross (before tax) income and property taxes divided by actual market value of homes, for the following four cases: i. The present system without the homestead exemption or circuit breaker. ii. With the homestead exemption of $10,000. iii. With the circuit breaker. Assume that renters and homeowners are eligible for the circuit breaker and that the circuit breaker is refundable, that is, if the amount of the income tax credit provided by the circuit breaker exceeds the amount a taxpayer owes in income taxes, then the taxpayer receives a check for the difference between the amount of the credit and the amount of taxes owed. In calculating the property taxes, subtract the circuit breaker credit from property taxes calculated in part (i). (b) Compare the impact of these two proposals on horizontal and vertical equity relative to the present system. For your calculations, assume each proposal is implemented independently. For example, the circuit breaker is implemented without the homestead exemption. (c) Based on all the criteria of tax evaluation (equity, efficiency, adequacy, and feasibility), which proposal would you recommend and why