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Growth rate

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Smith earned gross income of 40000 last year. According to the income tax structure, taxes are 25% of the first 20,000 of gross income plus 50% of the excess over 20,000. Thus smith paid 15000 in taxes and had after-tax income (ATI) of 25000. Inflation is forecast at 5% this year, and smith’s gross income will rise by 5% to 42000. The government is considering a new tax structure of 25% of the first 21000 plus 50%of the excess over 21000(full indexing). a. Show that if the government adopts the new tax structure the the real annual rate of growth in both Smith’s ATI and in his paid taxes is 0% b. Find the real annual rate of growth in Smith’s ATI and his taxes paid if the government continues with the old scheme (no indexing)

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