2. Calculate the Government’s real revenue and expenditure in 2005 prices. Is it increasing in inflation adjusted terms? What about its expenditure? Revenue and expenditure in 2005 prices is: Revenue (real) Expenditure (real) 2005 2006 2007 2008 2009 2010 318 339.361 382.7601 375.8761 383.5994 440.9346 343.8 378.2097 433.6682 445.6183 470.7681 548.8696 After adjusting for inflation, we can see that there is still an increase in revenue and expenditure, but that the rate of increase is much less than it was in nominal terms. Chapter 11: Analysing resource mobilization Compare two families where the head of the household of each family pays taxes on the entire income of their respective households. One family, Family A, has a total annual income of $150,000. The other family, Family B, has a total annual income of $9,000. Further, Family A spends $40,000 of their post-tax income every year on items consumed in their household. Family B meanwhile spends all their remaining post-tax income on consumption of basic goods and services (food, water, schoolbooks, transport etc). 1. Calculate the annual income tax each family would pay, and how much income they would have remaining? Family B pays $450 (5%) and has $8,550 remaining. Family A pays $18,375 tax (12.25%) and has $131,625 remaining. Income bracket (in dollars) Percentage 1–40,000 5% 40,001–80,000 10% 80,001–125,000 15% 125,001–200,000 22.5% Over 200,000 30% 2. The government decides to impose a value added tax (VAT) of 15% on all household consumables, with no exemptions. Now calculate from the remaining (post-tax) income what each household would pay in VAT tax. As a percentage of total income? Family B spends 15% of $8,550 = $1,282. This amounts to 14.25% of their total income of $9,000. Family A spends 15% of 40,000 = $6,000. This amounts to 4% of their total income of $150,000. 3. How much would each family pay in total (income and VAT) taxes as a proportion of their pre-tax income? Compare the two. Family B pays $450 + $1,282 of $9,000 = 19.25%. Family A pays $18,375 + $6,000 of $150,000 = 16.25%. Exercise answers | 173