Oct 02, 2017 term paper 2

CONSIDER A TAX SYSTEM WHERE THE FIRST $5,000 OF INCOME IS TAX FREE, THE NEXT $10,000 IS TAXED AT…

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Consider a tax system where the first $5,000 of income is tax free, the next $10,000 is taxed at 25 percent, and all income above $15,000 is taxed at 50 percent. There is a population of consumers with who earn wages between $2 and $32 per hour. Wages are uniformly distributed in the population. All consumers have preferences described by U = log(C) – L/1;000:

a. Find the mean average tax rate for the population.

b. Find the mean marginal tax rate for the population. How do these mean rates differ from the actual rates?


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