Employees Also Paid 1 Tax Computation

Employees Also Paid 1 Tax Computation

Employees Also Paid 1 Tax Computation

The Ukrainian tax system in the late 1990s had several components. The per- sonal income tax (calculated and paid on a monthly basis) had these brackets:

Zero if income was below one NTM 10% for income from 1 NTM 1 1 KBV to 5 NTM 20% for income from 5 NTM 1 1 KBV to 10 NTM, plus the tax on 5 NTM 30% for income from 10 NTM 1 1 KBV to 15 NTM, plus the tax on 10 NTM 40% for income from 15 NTM 1 1 KBV to 25 NTM, plus the tax on 15 NTM 50% for income above 25 NTM, plus the tax on 25 NTM KBV, karbovantsi; NTM, nontaxed minimum. The NTM was 1,400,000

KBV (one U.S. dollar was worth about 180,000 Ukrainian KBV). In September 1995, the average monthly salary was 9 million KBV.

Use of the NTM provides an easy way of adjusting the entire tax structure for the impact of inflation. Employers paid payroll taxes at these rates: 37 percent to the social insur- ance fund, 12 percent to the Chernobyl fund, and 2 percent to the employment fund. Employees also paid 1 percent to the employment fund.

  • Create a tax rate schedule for the Ukraine personal income tax.
  • Create a tax table for incomes from 9,100,000 KBV to 9,100,200 KBV.
  • Analysts calculate the tax wedge—defined to be the difference between the amount that the employer must pay to hire an employee and the amount that the employee receives net of all taxes as a percentage of the employee’s net—in examining the nature of tax systems. Compute the total tax wedge for a worker at the average monthly salary, at twice the average, and at five times the average.
  • Compute the average effective tax rate and the marginal tax rate for a worker at the three salary levels from part c.
  • Comment on the likely incentive effects of this tax structure.