c correct solutions

Suppose Montana establishes an income tax schedule that has a tax rate of 5% on the first $20,000 of income, 10% on the next $10,000, and then 20% on all taxable income above $30,000. Montana provides a $2,000 exemption (deduction) per family member. (Let's call this tax system A.) 1. The Abrams family has three members. Thomas is the sole earner, and he has two kids. The family's annual income is $35,000. Calculate their:

(a) Statutory marginal tax rate,

(b) Effective marginal tax rate,

(c) Taxable income

(d) Total taxes,

(e) Effective average tax rate.

2. The Brigham family has four members. Rachel is the sole earner, and she has three daughters. The family's annual income is $100,000. For the Brigham family, calculate the same 5 items as you did for the Abrams family in 1(a)-1(e). (a) Statutory marginal tax rate,

(b) Effective marginal tax rate,

(c) Taxable income,

(d) Total taxes,

(e) Effective average tax rate.

3. Suppose that under Montana's tax system, taxes are levied at the household level (i.e. the marginal tax rates apply to combined spousal income). Does this tax system provide Thomas and Rachel a financial incentive to marry each other, or does it provide a disincentive?

4. Suppose that Montana decides to move to a flat tax rate of 15%, keeping the $2,000 per family member exemption. (Let's call this tax system B.)

(a) Specify whether each family benefits or suffers from the new tax system.

(b) How has the marriage incentive or disincentive changed from that in system A?

5. Rather than implementing the flat tax system, Montana keeps the income tax schedule described first (A), but instead of providing a $2,000 exemption per family member, introduces a $2,000 tax credit per family member. (Let's call this tax system C.) (a) Which tax regime will each family prefer? Why?

(b) Why does the distinction between a credit versus a deduction matter so much in terms of total tax revenue?

6. Compare and contrast the vertical and horizontal equity implications of each of the three tax regimes A-C. (a) Which tax system is the most vertically equitable, and which is the least?

(b) Which regime is the most horizontally equitable, and which is the least?