Festwalia has two types of workers: low-skill workers, who earn $10 per hour, an
ID: 2494547 • Letter: F
Question
Festwalia has two types of workers: low-skill workers, who earn $10 per hour, and high-skill workers, who earn $20 per hour. The government of Festwalia currently imposes a 20% proportional tax on all labor earnings. It is considering replacing this tax with a new, regressive tax. The new tax system will raise the same total revenue as the original system, but it will do so by taxing the low-skill workers at a rate above 20% and exempting the high-skill workers from paying any tax at all. Will this new, regressive tax system be more or less efficient than the old, proportional tax system?
Explanation / Answer
Proportional tax for low-skill workers /hr = 10 * 0.2 = 2
Proportional tax for high-skill workers /hr = 20 * 0.2 = 4
Total Proportional tax per hour of work = 2 + 4 = 6
Regressive tax for low-skill workers /hr = 10 * >=0.2 >=2
Regressive tax for high-skill workers /hr = 20 * 0 = 0
Total Regressive tax per hour of work = >2 + 0 =>2
If the total number of low-skilled workers are high and high-skill workers are low, the total tax revenue may be equal in both cases. And the burden of tax should bear the low income labors, so most of the people should pay tax and only few will exempt from tax. This system can increase the rate of high-skilled labors and then the productivity will also increase. So the new system will help development, because if people want to avoid tax they should increase their skill. So for this people should participate and attain education and training; this will increase their productivity then the GDP, per capita income and national income. So for development objective the new system is good. On the other hand low income people have the burden of tax will adversely affect their living standard.
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