Consider the supply of the economy given by s=100+200w
Whereby w is the wage rate after tax and 250000 is is the minimum wage rate before tax.
a) as a tax policy analyst, set up a tax revenue function to help you in this analysis
b) sketch a diagram with tax rate on the horizontal axis and tax revenue on the vertical axis.
c) suppose that government imposes tax rate of 70%, what advice would you give?
d) at what tax rate revenues are maximized in this imaginary Tanzania economy?
a) The tax revenue function is given by: Tax Revenue = Tax Rate x (100 + 200w - 250000).
b) The diagram is shown below:
Tax Rate | Tax Revenue
------------------------
0 | 0
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70 | -17500000
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c) The advice would be to reduce the tax rate to a level that is more reasonable and will generate positive tax revenue.
d) The tax rate that maximizes revenue in this imaginary Tanzania economy is 0%. At this rate, the tax revenue is 0.