# Problem Set 5 Answers - ECON 454 Fall 2007 Department of...

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ECON 454, Fall 2007 Department of Economics, University of Maryland Jessica Hennessey Problem Set #5 Question 1 then 50% on all taxable income above \$50,000. The nation provides a \$4,000 exemption per family member. (a) Harry±s family has three members and earns \$50,000 per year. Calculate the family±s marginal and average tax rates. Taxable Income = Earnings Exemptions 50 ; 000 3(4 ; 000) = 38 ; 000 MTR = 25% ATR = Taxes Income = : 10(20 ; 000) + : 25(18 ; 000) 50 ; 000 = 6500 50 ; 000 = 13% (b) tax rates. Taxable Income = Earnings Exemptions 85 ; 000 5(4 ; 000) = 65 ; 000 MTR = 50% ATR = Taxes Income = : 10(20 ; 000) + : 25(30 ; 000) + : 50(15 ; 000) 85 ; 000 = 17 ; 000 85 ; 000 = 20% (c) Supposed that the country changed its tax code to a ²at tax of 30% with an \$8,000 per family member exemption. Would this change in the tax system make the system more progressive, more regressive, or neither? The ²attening of the marginal rate schedule tends to make this change less progressive. Indeed, the ²at 30% marginal rate structure is not progressive at all: any two families with positive taxable income will face the same marginal tax rate, regardless of their income. On the other hand, the increase in the per-family-member exemption tends to make the average rates more progressive. Question 2 The largest tax break for most Americans is the mortgage interest tax deduction, which allows home owners tax break is intended to encourage home ownership. Compare this tax deduction to a uniform tax credit for home ownership on equity and e¢ ciency grounds. The more expensive the home, the larger the mortgage; the larger the mortgage, the bigger the deduction. Compounding this e/ect is the tendency for wealthier people to live in larger, more expensive homes and

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Problem Set 5 Answers - ECON 454 Fall 2007 Department of...

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