Table 1 shows income tax paid by three workers after a government changed tax thresholds. Annual income ($) Income tax paid before change ($) Income tax pai...
Question 1 Report
Table 1 shows income tax paid by three workers after a government changed tax thresholds.
| Annual income ($) | Income tax paid before change ($) | Income tax paid after change ($) |
|---|---|---|
| 18 000 | 900 | 400 |
| 40 000 | 5 200 | 4 600 |
| 100 000 | 24 000 | 23 700 |
(a) Calculate the decrease in tax paid by the worker earning $18 000. [1]
(b) Explain why this tax change may be progressive. [2]
(c) Analyse one possible effect of the change on government revenue and spending. [3]
Answer Details
(a) The worker earning \($18\,000\) pays:
\[900-400=500\]
The decrease in tax paid is \($500\). [1]
(b) The change may be progressive because the lower-income worker receives a larger tax reduction relative to income or relative to tax paid than the high-income worker. [1] This narrows differences in disposable income, making the tax system more progressive in effect. [1]
(c) Income-tax revenue may decrease because workers pay less tax. [1] The government may then need to borrow more, increase other taxes, or reduce spending. [1] If it reduces spending, aggregate demand may fall, which can reduce output and economic growth. [1]
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