Problem
Consider the income tax equation given by
B(y) = A + b*max[0,(y-E)]
where y is the individual's income, and B(y) is the total tax paid.
Provide a real-world interpretation for parameters A and E
1) Draw two clearly-labelled graphs illustrating total, marginal and average tax paid using A=$500, b=0.1, and E=0. Draw total tax paid on one graph, and marginal and average tax rates on another graph. Over which values of income is this tax system progressive?
2) Draw another set of graphs illustrating total, marginal and average tax, using A=0, b=0.2, E=5,000. Over which values of income is this tax system progressive?
Commodity taxes are usually thought to be regressive. Why? Is this the case in Canada?
3) Governments have tried to impose head taxes in the past. What is the equation for a head tax? (specify values for A, b, and E). What is the economic rationale for a head tax? Are income taxes equivalent to head taxes?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.