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Government Microeconomic Intervention Pt.4
Government Microeconomic Intervention Pt.4
The average tax rate is the total amount of tax divided by total
income.
The marginal tax rate is the amount of additional tax paid for
every additional dollar earned as income..
Calculating Marginal & Average tax
Joe has an annual income of IDR 400 Million
Income Bracket Tax owed
Tax rate Income
(IDR Million) (IDR Million)
0 - 50 5% 50 2.5
50 - 250 15% 200 30
250 - 500 25% 150 37.5
500 and above 30% - -
Total 400 70
• In this case, the government is giving a subsidy of $14 (36-12). The subsidy
shifts the supply curve to the right.
• It leads to a lower market price. Price falls from $30 to $22.
• Quantity demand increases from 100 to 140
Deadweight loss
Lets practice
Transfer payments
Government expenditure
With the tax revenue raised governments may spend money on such
items as:
•Pensions
•Health service
•Benefits to those out of sick, young or others unable to care for
themselves (social security payments)
•Education
•Defence
•Unemployment benefit