Fernando earns $35 000 in 2015. Calculate his average rate of tax.

Maki, who earns $70 000 in 2015, pays an average rate of tax of 27.14 %. Using the figures provided in Table 1, outline why her average tax rate is higher than that of Fernando.

Outline one potential advantage and one potential disadvantage of a progressive tax system.

Fernando receives a pay rise in 2016. His total income rises to $43 000. Calculate the percentage of his additional income which must be paid as tax.

Country Z implements a 10 % sales tax in 2016. Explain why an indirect tax is unlikely to be used as a mechanism to promote equity.

Calculate the percentage of income received by the highest 20 % in Country X. Enter your answer in Table 2.

Outline why Country X has a higher Gini coefficient, using the data in Table 2.

On the following axes, plot the Lorenz curve for Country Y.

Outline why the Gini coefficient must have a value between 0 and 1 (or between 0 and 100).

Country X raises the level of transfer payments. Explain two reasons why this policy could help to break the poverty cycle.

(0 × 10 000) + (0.1 × 10000) + (0.2 × 15 000) = 4000 

$\frac{4000}{35000}\times 100$

= 11.43% or 11.43 
N.B. The % sign is not necessary as the question asks for the “rate”.

Any valid working is sufficient for [1].
An answer of 11.43% or 11.43 without any valid working is sufficient for [1] only.

A candidate who calculates the tax paid as $3999.7 should be fully rewarded.

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 There is limited understanding. [1] 
For the idea that her income is subject to higher marginal tax rates and so her average tax rate is higher OR Maki’s average tax rate is higher than Fernando’s because her income falls into a higher tax bracket and she therefore has a higher marginal tax rate.

2 There is clear understanding. [2]
For explaining that Maki’s marginal tax rate (60%) is higher than her average rate (27.14%), which causes the average tax rate to be higher when income is higher. Therefore, since Maki earns twice as much as Fernando, her average tax rate is higher. Alternatively, candidates may explain, using figures to support their answer, that Maki earns twice as much income as Fernando and pays more than twice as much tax.

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 The written response is limited. [1] 
For providing one advantage OR one disadvantage.

2 The written response is clear. [2]
For providing one advantage AND one disadvantage.

The potential advantages are:

• incomes are to some extent redistributed to become more equal
• improvement in equity
• less inequality in income distribution may improve social cohesion
• larger tax revenues may be raised.

The potential disadvantages are:

• incentives to work or to invest may be reduced
• there may be a misallocation of (labour or human capital) resources
• high income earners may leave the country
• more incentives for tax evasion.

Rise in income = 43 000 − 35 000 = $8000

New tax payment = (0.1 × 10 000) + (0.2 × 20 000) + (0.4 × 3000) = $6200 [1]

Original tax payment = $4000
Rise in tax = 6200 − 4000 = $2200 [1]

OFR applies if part (a)(i) has been answered incorrectly.

$\frac{2200}{8000}\times 100$

= 27.5% [1]

An answer of 27.5%, 27.5, 0.275 or 0.28 without any valid working is worth [1].
Any valid alternative approach should be fully rewarded.
Any valid working is worth [1].

OFR applies if the rise in tax has been calculated incorrectly.

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 The written response is limited. [1–2] 
For the idea that indirect taxes are inequitable because lower income earners are affected more.

2 The written response is accurate. [3–4]
For explaining that indirect taxes are inequitable because lower income earners are affected more AND that this is because the indirect tax paid will be identical for two individuals who buy the same item, so the higher income earner will pay a lower proportion of his income on the tax than the lower income earner. Therefore, the tax may be seen as unfair.

The term “regressive” is not necessary, provided it is implied.
A response which explains accurately that an indirect tax will lead to greater inequality may be awarded [4] – the link to equity is implied.

100 − 3.0 − 6.8 − 12 − 20.1 = 58.10 

An answer of 58.10 without any valid working is sufficient for [1]. Placing the result in the table is not necessary.

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 The written response is limited. [1]
Country X will have the higher Gini coefficient because the income distribution is more unequal.

2 The written response is clear. [2]
Country X will have the higher Gini coefficient, as the lowest 40% of the income groups are only receiving 9.80% of the country’s total income, while the top 40% are receiving almost 80% of the total income. However, in Country Y, the lowest 40% receive 25% of the income, a higher share than in Country X, while the top 40% receive 55%, which is a lower share than in Country X.

A response including some accurate and relevant reference to the data, with a resulting comment that the distribution of income is more unequal in Country X should be awarded [2].

For correctly labelled axes. [1]
N.B. % of income/households/population are acceptable labels for the axes. The scale only needs to be shown for 10, 20, 30 etc.

For drawing a Lorenz curve below the diagonal. [1]

For an accurately plotted Lorenz curve – allow very minor discrepancies. [1]

(To be correct: 0% at 0%; 10% on vertical axis at 20% on horizontal, 25% at 40%, 45% at 60%, 70% at 80%, 100% at 100%.)

N.B. A candidate might use a different scale from the one above – using only a portion of the grid. Provided this is accurate and the plotting of points is approximately correct, then the third mark may be awarded.

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 The written response is limited. [1]
The Gini coefficient is measured by the area between the Lorenz curve and the diagonal divided by the total area beneath the diagonal (half square) OR that a Gini coefficient of 0 implies perfect equality (of income).

2 The written response is clear. [2]
The Gini coefficient is measured by the area between the Lorenz curve and the diagonal divided by the total area beneath the diagonal (half square). Therefore it can only yield any number between 0 and 1 (or between 0 and 100 when multiplied by 100). (Perfect equality would have a coefficient equal to zero, while perfect inequality would have a coefficient equal to 1 (or 100).)

Level 
0 The work does not reach a standard described by the descriptors below. [0]

1 The written response is limited.
For providing one reason without explanation. [1]
For providing two reasons without explanations OR for providing one reason with explanation. [2]

2 The written response is accurate.
For providing one reason without explanation and one reason with explanation. [3]
For providing two reasons with explanations. [4]

Reasons may include:

• the poorest will receive transfer payments, so they will be able to invest in human capital (education)
• the poorest will receive transfer payments, so they will be able to invest in human capital (health care)
• the poorest will receive transfer payments, so they will be able to invest in physical capital (housing, sanitation and small businesses)
• the poor will be able to save more, resulting in more investment
• any other reasonable response.

An explanation which accurately combines two points (eg health and education) rather than explaining each one separately may be awarded full marks.

The explanation might relate to the poverty cycle for a household or for the economy.

Lower achieving candidates struggled to calculate the correct amount of tax to be paid ($4000) but the majority of candidates succeeded. Most of the latter were then able to calculate the average tax rate successfully.

The majority of candidates demonstrated an understanding of the nature of the tax system provided (progressive) but it was common for candidates to neglect to use the data provided or to refer to the concepts of average and marginal tax rates.

This question was well-answered.

Higher achieving responses demonstrated a sound grasp of tax calculations by applying the appropriate rates to the additional $8000, calculating the additional tax $2200) and converting to a percentage. The majority calculated the new level of tax ($6200) but there were many errors. It was somewhat surprising to see that many candidates who had earned full marks for part (i) could not do so again in this question part.

The vast majority of candidates were able to recognize that a sales tax may be inequitable, and while most attempted to explain why, explanation was limited in many cases. Although the term “regressive” was not required, the idea that indirect taxes are regressive needed to be explained.

This question was well-answered.

Although many candidates neglected to use the data provided or to use this data to compare Country X and Country Y, understanding of the relationship between inequality and the Gini coefficient was evident in most responses. Several responses mixed equality with equity, though.

This question was generally well-answered. Most candidates were clearly aware of a Lorenz curve and its derivation. Some careless errors were seen, such as incorrect plotting, mixing the axes and numbering axes incorrectly. The use of “quintile” as a label on the horizontal axes was not rewarded.

This question was generally well-answered. The majority of candidates referred to the formula and showed that the result could not lie outside the limits given.

There were many good answers to this question. Candidates recognized that households who spent transfer payments on health and education, or on better food/cleaner water, could lift themselves out of the poverty cycle. Candidates were also rewarded for explaining that greater income could lead to more saving and thus investment, again breaking the cycle. There was some confusion among lower achieving candidates regarding the nature of transfer payments, together with some repetition in the two reasons given.