The govt of bigtown is concerned about its revenues It has i

The govt of bigtown is concerned about its revenues. It has increased it tax rate from 2.2% to 2.8% fr companies with net business income exceeding $2M while at the same time reducing the rate from 2.2% to 1.9% for companies with net business income between $1M and $2M. Companies with less than $1M net business income are not taxed. Requirements: For each of the following 4 situations: a, determine total projected govt revenues before and after the tax increase. b, explain in couple of sentences whether and why you consider this good or bad tax policy. Situation 1: The total amount of net taxable business income for companies with income exceeding $2M remains static at $50M and net taxable income for companies with income between $1M and $2M remains static at $100M for the entire town. Situation 2: total amount for the net taxable business income decreases from $ 50M to $48Mfor companies with income exceeding $2M due to business moving to a different jurisdiction. The net taxable income for companies with income between $1M and $2M remains static at $100M. Situation 3: the total amount of net taxable income for businesses with income exceeding $2Mdecreases from $50M to $45M ue to bsiness moving to different jurisdiction. However, total taxable income for companies with income between $1M and $2M increased from $100M to $110M. Situation 4: total amount of net taxable business income for businesses with income exceeding $2M decreases from $50M to $47M due to business moving in different jurisdiction. However, total taxable income for companies with income between $1M to $2M increased from $100M to $120M.

Solution

Situation 1 Net taxable income Tax rate before change Projected govt. revenue New Tax rate Projected govt. revenue after change Companies with income exceeding $2M $50M 2.20% $1.1M 2.80% $1.4M Companies with income between $1M and $2M $100M 2.20% $2.2M 1.90% $1.9M $3.3M $3.3M In this situation, govt. revenue is same before and after the increase in tax rate, as the govt. is reducing the tax rate for the companies with income between $1M and $2M. This is a good tax policy as the tax burden is shifted to companies with income exceeding $2M Situation 2 Net taxable income Tax rate before change Projected govt. revenue New Tax rate Projected govt. revenue after change Companies with income exceeding $2M $48M 2.20% $1.056M 2.80% $1.344M Companies with income between $1M and $2M $100M 2.20% $2.2M 1.90% $1.9M $3.256M $3.244M In this situation, projected govt. revenue decreased after the changes in the tax rate. This is a bad tax policy due to which companies are moving to different jurisdiction with lower tax rates Situation 3 Net taxable income Tax rate before change Projected govt. revenue New Tax rate Projected govt. revenue after change Companies with income exceeding $2M $45M 2.20% $0.99M 2.80% $1.26M Companies with income between $1M and $2M $110M 2.20% $2.42M 1.90% $2.09M $3.41M $3.35M In this situation, projected govt. revenue decreased after the changes in the tax rate. This is a good tax policy as the tax for lower income group is decreased and tax for higher income group is increased which is fair. Situation 3 Net taxable income Tax rate before change Projected govt. revenue New Tax rate Projected govt. revenue after change Companies with income exceeding $2M $47M 2.20% $1.034M 2.80% $1.316M Companies with income between $1M and $2M $120M 2.20% $2.64M 1.90% $2.28M $3.674M $3.596M In this situation, projected govt. revenue decreased after the changes in the tax rate. This is a good tax policy as the tax for lower income group is decreased and tax for higher income group is increased which is fair.