Taxation Policy and Structure
ECON 353 – OP01
There are 6 questions in the assignment with a total of 30 marks available. The assignment must be submitted by 11:59pm MDT on the due date to avoid a penalty. Submit by email with the subject “Assignment 2 <Student Name, Student ID>”.
- In 2015, the Government of Canada introduced a reduction in income tax for the middle class, and an increase in income tax for incomes greater than $200,000. Using your knowledge of tax theory, discuss the merits of this plan. [4 marks]
- Consider an individual who earns $100,000, pays $7,000 in child care expenses for one child, pays the maximum ($26,010) in Registered Pension Plan (RPP) contributions, makes charitable donations of $200 (15 percent credit), and pays $20,000 in medical expenses. Medical expenses in excess of 3 percent of net income are deductible at 20 percent. The statutory marginal tax rate is 17 percent.
What is the federal tax payable? What is the individual’s actual (effective) marginal tax rate? [6 marks]
- Suppose you want to save for retirement. How do you decide between investing in a TaxFree Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP)? [4 marks]
- There is a tax system with three marginal tax rates: 10% for income up to $40,000, 25% for income between $40,000 and $100,000, and 35% for all income above $100,000. Both Mr. and Mrs. Smith have an income of $65,000.
- Suppose individuals are the taxable unit. Calculate the individual tax liabilities, and total liability for the family. [2 marks]
- Now suppose the family is the taxable unit. Calculate the family tax liability. [2 marks]
- Does the choice of taxable unit matter? Explain. [2 marks]
- Canadian citizens tax liability depends on where they live in the world (residency basis), while the United States citizens tax liability is roughly independent of where they live in the world (citizenship basis). How does this influence the decision on where to live? Which system is more efficient? [4 marks]
- Does a “rational” individual always reduce labour supply in response to a proportional income tax? Why or why not? Use the labour-leisure model to illustrate your response. [6 marks]