Paper 3 question: USA's new tax regime (HL only)
Donald Trump, a rank outsider to the political elite, made a reform of tax laws one of the first changes made by his administration. This page includes a paper three type question on some of those changes.
A reminder that under the syllabus P3 questions are now graded out of thirty and contain quantitative as well as a policy questions.
Lesson time: 50 minutes
Paper three type question practise although this page also includes the option of discussing the impact of the new tax changes at length, for example a consideration of whether the changes to tax are more favourable for the poorest in society or the wealthiest?
New tax rates for the financial year 2018
|Income earned in one year $||Tax rate applied in 2016||Income earned in one year $||Tax rate applied under Trump|
|up to 18,550||10%||up to 19,050||10%|
|18,550 - 75,300||15%||19,051 - 77,400||12%|
|75,301 - 151,900||25%||77,401 - 165,000||22%|
|151,901 - 231,450||28%||165,001 to 315,000||24%|
|231,451 - 413,350||33%||315,001 to 400,000||32%|
|413,351 - 466,950||35%||400,001 to 600,000||35%|
|over 466,951||39.6%||over 600,000||37%|
Other changes to the income tax system
Capital gains tax to remain unchanged at 20%.
The 3.8% tax implemented as part of President Obama's health care programme to be scrapped.
The alternative minimum tax also introduced by the previous administration to be discontinued.
Corporation tax rate reduced from 35% to 21%.
More generous changes to childcare allowances will mean that many low income American families will effectively be paying zero marginal income tax.
Paper three type activity
This question is worth [30 marks]. This paper is based on the new syllabus and contains a policy response question.
1a. Define the following term:
i. Capital gains tax [2 marks]
ii. Corporation tax [2 marks]
b. Are the proposed changes to income tax an example of a more progressive or regressive tax system? [2 marks]
c. Suggest possible options for the Trump administration in order to balance the budget between government revenues collected and public spending, given the significant proposed falls in income tax rates. [4 marks]
d. Calculate the level of income tax paid by the following income earners under the previous administration? [2 marks]
- $ 20,000
- $ 44,510 (the average income in the country, among income earners over 15 years of age.)
- $ 150,000
e. Calculate the level of income tax paid by the following income earners under the proposed tax rates? [2 marks]
- $ 20,000
- $ 44,510 (the average income in the country, among income earners over 15 years of age).
- $ 150,000.
f. Outline one benefit of both progressive and regressive tax systems? [2 marks]
The level of income tax in Belgium is represented on the following table:
|Annual income||Tax rate inc. social security|
|$ 12,811 - $ 14,709||43%|
|$ 14,710 and $ 24,511||53%|
|$ 24,512 - $ 44,917||58%|
|$ 44,918 +||63%|
g. Calculate the level of tax paid by residents from Belgium and USA (using the 2018 tax rates) at the following income levels: [2 marks]
- $ 30,000
- $ 40,000
- $ 100,000
h. Calculate the average tax rate of an individual earning $ 100,000 in both countries. [2 mark]
i. Using the data provided and your knowledge of economics, recommend a policy which the US government could introduce to address the level of inequality in the nation. [10 marks]
Answers available at: Tax responses