This economics question tests your understanding of economic models and analysis. The step-by-step answer below applies the relevant framework and explains the reasoning.
ScanSolve AI Answer
Step 1: Calculate Sarah's monthly taxable income. Sarah's monthly taxable income is the sum of her basic salary, house allowance, and commuter allowance. Taxable Income = Basic Salary + House Allowance + Commuter Allowance Taxable Income = 72940 + 16160 + 8000 Taxable Income = 97100 Ksh. a) (i) Sarah's monthly taxable income: The monthly taxable income is 97100 Ksh.. Step 2: Calculate the total income tax charged on Sarah's monthly income using the given tax bands. The tax bands are: • Up to 13100: 10% • 13101 - 22600: 15% • 22601 - 32100: 20% • 32101 - 41600: 25% • 41601 and over: 30% Calculate the tax for each band: • Band 1 (0 - 13100): Tax = 13100 × 0.10 = 1310 Ksh. • Band 2 (13101 - 22600): Width = 22600 - 13100 = 9500 Ksh. Tax = 9500 × 0.15 = 1425 Ksh. • Band 3 (22601 - 32100): Width = 32100 - 22600 = 9500 Ksh. Tax = 9500 × 0.20 = 1900 Ksh. • Band 4 (32101 - 41600): Width = 41600 - 32100 = 9500 Ksh. Tax = 9500 × 0.25 = 2375 Ksh. • Band 5 (41601 and over): Income remaining for this band = Total Taxable Income - 41600 Income remaining = 97100 - 41600 = 55500 Ksh. Tax = 55500 × 0.30 = 16650 Ksh. Total income tax = Sum of tax from all bands Total Income Tax = 1310 + 1425 + 1900 + 2375 + 16650 Total Income Tax = 23660 Ksh. a) (ii) Total income tax charged on Sarah's monthly income: The total income tax charged is 23660 Ksh.. Step 3: Determine the monthly tax relief allowed. Given that Sarah's net monthly tax is Ksh. 21260. Net Monthly Tax = Total Income Tax - Tax Relief Tax Relief = Total Income Tax - Net Monthly Tax Tax Relief = 23660 - 21260 Tax Relief = 2400 Ksh. b) Determine the monthly tax relief allowed: The monthly tax relief allowed is 2400 Ksh.. Step 4: Calculate tax under the proposed new tax bands. The first income tax band is expanded by 20%. Original first band width = 13100 Ksh. New first band width = 13100 × 1.20 = 15720 Ksh. New Band 1: Up to 15720 (10%) The next three tax bands retain their size (9500 Ksh. each). New Band 2: 15721 - (15720 + 9500) = 15721 - 25220 (15%) New Band 3: 25221 - (25220 + 9500) = 25221 - 34720 (20%) New Band 4: $34721 - (34720 + 9500)