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Taxes project

1. In Fairistan, annual income taxes are set up in brackets:



The x-axis shows thousands of Fairistani dollars; the y-axis shows the tax rate for income earned
in each range. Thus, the first 20 thousand dollars are not taxed; the second 20 thousand dollars
(from 20 to 40 thousand dollars) are taxed at a 10% rate.

a. Sketch the integral
0
( ) ( )

x
T x t x dx below. Label axes clearly, as well as key points
(such as x =2, 4, ).










b. What is the meaning of T (x)? Use units.





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c. What is the slope of the tangent to T (x) at x =8? What does it represent?



d. If a person earns 80 thousand Fairistan dollars in income and receives a pay raise of 1
dollar, how much extra tax does she pay?



2. The trade and commerce minister of Fairistan proposes a flat tax: the first 40 thousand dollars in
income will be tax-free, and all income above that will be taxed at 35%.

a. Sketch a graph of T (x) from x =0 to x =10 below. Label axes and key points clearly.











b. Write a function for T (x) for x >4.



c. The minister makes his case plotting a graph of
( )
( )
T x
E x
x
. Use your answer to part
(b) above to find a function for E (x) and graph it below.











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d. E (x) stands for effective tax rate. Explain the meaning of the name.



e. What is lim ( )
x
E x ? What does this mean?




f. Look back at problem 1. What is the lim ( )
x
E x ?




3. The finance minister of Fairistan rejects the proposal for a flat tax. She argues that government
should find a function for E (x) such that the lim ( ) 1

x
E x .

a. Explain her reason for this condition.



b. In response to the finance minister's request, one staffer suggests
1
( ) 1
1
E x
a x
= -
+
,
where a could be any constant greater than zero. Show how this meets the finance
minister's condition.





c. Say a =0.02. Remember that
( )
( )
T x
E x
x
. Find the function T (x), then use it to
calculate the taxes of a Fairistanian million-dollar income earner (x =1,000) and billion-
dollar earner (x =1,000,000).






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d. What is the millionaire's take-home pay? The billionaire's?




e. Prove what the limit of take-home pay under this proposed system is.






4. The central banker of Fairistan, who is the most mathematically savvy of them all, points out that
1
( ) 1
1
E x
a x
= -
+
fails because of the power of x in the equation. Instead, she suggests using
the function
1
( ) 1
( 1)
b
E x
a x
= -
+
, where 0 <a and 0 <b <1.

a. Pick a value for b and show that the lim ( ) 1

x
E x .




b. Explain why this would be true no matter the b, so long as 0 <b <1.




c. Pick a value for a as well and show that, unlike the finance ministers proposal, take
home pay will always continue to grow. (Youll need to use lHopitals rule.)







d. Can you reconcile the really odd results from (a) and from (b)? How are both things
possible?


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5. The ministers all agree to the central bankers system. They decide that they want to keep the tax
rate for Fairistanian citizens earning 40 thousand dollars as close as possible to the existing rate,
and the same for citizens earning 100 thousand dollars. Play around with the GeoGebra
demonstration until you find the best possible values for a and b.




6. The human welfare minister adds another condition: (0) 10 E =- . This is similar to the earned
income tax credit: the very poor would get a negative tax bill, that is, a tax rebate. Find a way to
alter your answer for question 5 to meet this additional condition.




Homework

7. The following graph shows income (in thousands of dollars) vs. federal income tax (in thousands
of dollars), assuming only the standard deduction. Please note the axes scales are not linear
(they are logarithmic), so the graph can fit on the page.



a. What is the effective tax rate Doug, whose salary is $44,000, will pay?


b. What is the effective tax rate J an, whose salary is $93,100, will pay?


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c. The different segments represent brackets, that is, each person pays a different rate on his
income that falls in each bracket. For example, Doug pays a 0% rate on the first $9,500
he earns. On the next $8,500 he earns, he pays a rate of 10% (or 850/8500). If Doug
earned $1 more, how many extra cents of tax would he pay?


d. Emily pays an effective tax rate of exactly 13%. How much is her salary?


e. Horatio pays an effective tax rate of exactly 16%. How much is his salary?


f. Does someone pay an effective tax rate of exactly 15%? How do you know?



8. Mr. Hanes claims that you can estimate your taxes somewhat closely with the function
( ) 13.855 0.35 6.5ln( 0.7) t x x x = + - - , where x is income in thousands of dollars and t is total
tax in thousands of dollars:

a. What is the actual tax rate people pay on income between $44,000 and $93,100?


b. What is the tax rate Mr. Hanes formula would predict on one additional cent Doug
earned?


c. What is the tax rate Mr. Hanes formula would predict on one less cent J an earned?


d. On the function t (x), find the x where Mr. Hanes formula predicts the exactly correct
actual tax rate for this bracket.