Optimal Labour Taxation

Question 1

How does the gov use tax and transfers to reduce inequality

Answer 1

• gov use tax to raise revenue
• this revenue funds a transfer programme: - universal transfer ( public education, healthcare benefits) and means tested (in kind and cash benefits)

Question 2

What is adjusted gross income

Answer 2

The sum of all income sources ( both labour and capital income sources )
Exclusions: charitable donations and pension contributions

Question 3

Taxable income

Answer 3

AGI - personal exemptions - deduction
Tax free allowance on saving interests and dividends

Question 4

What is tax in the UK

Answer 4

Tax T(z) is a piecewise linear and continuous function of taxable income with constant marginal tax rates (MTR) T’(z)

Question 5

What tax is counted as a personal exemption

Answer 5

The first 11,850 is not taxed

Question 6

What are the tax brackets in the UK

Answer 6

Basic rate: Between 11,850 - 46,350 taxed at 20%
High rate: between 46,351 - 150000 taxed at 40%
Additional rate: above 150k taxed at 45%