Calculate the net federal tax (line 420 on the T1 General form) for the following hypothetica

| November 25, 2016


Question 1

Calculate the net federal tax (line 420 on the T1 General form) for the following hypothetical individuals using the 2014 tax forms: T1 General, Schedule 1 and Schedule 11. Those forms are available at on:

Mary has an employment income of $60,000.

Tom has an employment income of $60,000, Eligible Tuition fees of $5000, and was in school full time for 8 months.

Patrick has an employment income of $7,200, Eligible Tuition fees of $5000, and was in school full time for 8 months.

How might the results be different for Tom and Patrick if tuition, education and textbook amounts were a deduction instead of a non-refundable credit?

There are provisions to carry forward tuition, education and textbook amounts to future years. Which of the hypothetical individuals would benefit from this most?

To simplify your calculations, make the following assumptions:

1) The individual has no eligible deductions (item 207 to 232 on T1 General).

2) Other than 1) the basic personal amount (item 300 on Schedule 1), 2) EI premiums (item 312 on Schedule 1), 3) CPP contributions (item 308 on Schedule 1) and/or 4) tuition, education and textbook amounts (item 323 on Schedule 1), the individual has no other eligible amounts for the federal non-refundable tax credits.

3) The individual is single and does not transfer the credits to his/her parents.

4) The individual does not have any unused federal tuition, education and textbook amounts amounts from previous years (line 1 on Schedule11).

5) The individual is not self-employed and has no other form of income.

Note: In the real world, you have to do the same tax calculations for the provincial personal income tax as well.

Question 2

Alfred, who has personal income tax rate of 40%, holds an oil stock that appreciates in value by 10% each year. He bought the stock one year ago. Alfred’s stock broker now wants him to switch the oil stock for a gold stock that is equally risky. Alfred has decided that if he holds on to the oil stock, he will keep it only one more year and then sell it. If he sells the oil stock now, he will invest all the after-tax proceeds of the sale in the gold stock and then sell the gold stock one year from now. What is the minimum rate of return the gold stock must pay for Alfred to make the switch? Relate your answer to the tax on capital gains.

Question 3

Property tax is a tax administered at the local government level in Canada. Is the property tax a regressive tax or a progressive tax in Canada? Explain your answer.

Question 4

In January 2000, delegates at the founding convention of the Canadian Alliance (a predecessor to the current Conservative Party) voted to make a 17 percent “flat-rate” tax the cornerstone of the new party’s election platform. The shift would reduce the top marginal rate applied to high-income individuals. Part of the rationale was to give highly productive Canadians renewed incentives for work. Use the graphical model of leisure-income decisions to analyze the rationale.

Question 5

Use the life-cycle model to evaluate whether a rational saver would follow this piece of advice: “To compensate for falling interest rates, aim to save more every month.”

Question 6

On July 1, 2006, the federal government reduced the GST rate but raised the income tax rate in the lowest tax bracket to help make up for the lost revenues. Discuss the possible effects of this reform on the incentives to save and to work.

Question 7

The inverse demand P(Q) for bowling balls is given by P = 100 – 5Q where P is the price of bowling balls and Q is the consumption of bowling balls. One store sells bowling balls, the supply is given by P = 50 + 5Q.

a) What is the total quantity of bowling balls consumed and what is the price per unit. What is the consumer surplus and the producer surplus.

b) The government set a tax of $10 on bowling balls, what is the total quantity of bowling balls consumed, the price paid by consumer and the price received by the store. What is the consumer surplus, the producer surplus, the tax revenue and the deadweight loss. What is the share of the tax paid by the consumer and the one paid by the producer.

Question 8

For each of the following two markets, describe who between the consumer and the producer will be the most opposed to a tax increase. Also comment on the size of the deadweight loss in each of those market.

a) The BC market for natural gas is characterized by a very inelastic demand (at least in the short run). Moreover, since it is supplied by a monopoly the supply is very inelastic.

b) The demand for Donair on Commercial drive is very elastic since there are many other competing food options. Due to the low cost of starting a Donair restaurant, close to free entry implies that the supply for Donair is also very elastic.

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