Background on the Kingdom and Economy of Rodos - Rodos is a small agrarian island kingdom. Most Rodosian citizens live in small towns or in rural areas. King Valdimar and his royal court, on the other hand, live in the country's single, geographically centralized city. - King Valdimar, an enlightened ruler, wants to create an economy that improves Rodosians' standard of living and quality of life. He is also concerned with being as fair as he can to each citizen. - The king has vast property holdings, but he does allow his citizens to own real and personal property, which can be used to generate the income to improve their standard of living and to pay their taxes. - Tax revenues are used to provide for the island's defense and general services, such as a postal system and the construction and maintenance of roads, bridges, and similar structures. - Financial markets are rudimentary but effective. Citizens and businesses with more income than they require may deposit their funds into banks, who in turn may lend these funds to qualified borrowers. - Rodos's equity markets are more constrained; owners are not allowed to sell more than 40% ownership of their company. So, though equity markets exist, there aren't many companies nor large numbers of shares bought and sold. Selected Provisions of the Rodosian Tax Code - King Valdimar's current tax regime, both personal and corporate, is intended to be fair to everyone. The personal tax assesses the same tax 1,200 sodors (SR) per year-on each person, regardless of circumstance (rich or poor) or station (member of court, businessman, craftsman, or fisherman). - The taxable income of all businesses-regardless of form (proprietorship, partnership, or corporation)-is subject to a 10% tax rate. - Neither interest on borrowed funds nor dividends on outstanding shares are allowed to be paid using pre-tax income. Normal operating expenses, however, are tax-deductible. questions to be addressed. (Hint: For a brief reminder of relevant terms, click on the Definitions tab. Also, don't confuse the behaviors of the average I. What general observations can be made regarding tax systems in general and the Rodosian tax code? A. In general, there are three different types of tax systems: progressive, regressive, and flat tax systems. The existing Rodosian system imposed on individual (personal) taxpayers is an example of a system. One benefit of the existing system is that it increases the kingdom's B. In contrast, the existing system imposed on businesses is an example of a system. A benefit of this arrangement is that all business organizations-regardless of income or asset holdings-pay the same A. In general, taxes are classified as and both an individual's disposable income and a business's after-tax profits. B. An advantage of the existing personal tax requirement is that it allows an individual Rodosian to keep income increases. The requirement of a constant annual tax payment of SR1,200 means that as his or her annual income increases from SR12,000 per year to SR35,000, the proportion of his or her income lost to taxes decreases from to . In general, this type of tax arrangement should be expected to the average individual Rodosian to improve his or her income and quality of life. C. A second advantage of Rodos's existing personal tax arrangement is its , which makes it expensive to comply with the requirement. Everything else being equal, this characteristic tends to a citizen's disposable income. D. Similarly, an advantage of the current business tax requirement is that it is identical for all business organizations. According to this arrangement, a business organization will be able to retain for every pre-tax sodor earned. From these after-tax profits, it will then pay any owed on its borrowed capital and any to its shareholders. Given these provisions, the current system the use of one form of financing (debt versus equity) over the other. This is because the arrangement allows for the tax deductibility of financing. Given these tax schedules, calculate the tax liabilities for: - Gullivers' Goldsmiths Company, which earns an income of SR25,000,000 - The following three individual taxpayers: (1) Gunnar, a beekeeper earning SR12,000 per year; (2) Marget, a cooper (barrel maker) earning SR35,000 per year; (3) Bjorn, a banker earning SR70,000 per year Assume that Gunnar owes the same tax liability under both the current tax system and the proposed (progressive) system. As an economically rational taxpayer, why should he prefer the current system? Because under the current system the next sodor earned would be taxed at the rate of 1.2%; under the progressive system, it would not be subject to any tax. Because under the progressive tax system the next sodor earned would be taxed at the highest tax rate (20\%); under the current system, it would be exempt from additional taxes. Because under the progressive tax system the next sodor earned would be taxed at the rate of 10%; under the current system, it would not be subject to any tax. Policy Proposal 2: Impose a special tax on individual taxpayers who purchase or own a cart and wagon that costs more than SR12,000. (The average cost of a Rodosian cart or wagon is SR6,000.)