Question

Consider 3 individuals with incomes equal to 10,000, 20,000 and 40,000 euros. They face an income tax rate equal to 10%. Assume that a deduction from the tax base (taxable income) of 5,000 euros is introduced.

What is the Gini coefficient after taxation? (Round your answer to three decimal places.)

Select one:

a. 0.199

b. 0.359

c. 0.279

d. 0.239

e. 0.319

Answer 1

3 individuals with income of 10,000, 20,000 and 40,000 euros

If they are liable to pay 5,000 euros of tax.

Score is calculated as: [% of Income * (Fraction of population + 2 * Fraction of population that is richer)]

Income before tax	Income after tax	% of Income	% of Population	% of population that is richer	Score
10000	5000	0.09	0.33	0.67	0.15
20000	15000	0.27	0.33	0.33	0.27
40000	35000	0.64	0.33	0.00	0.21
					0.64

Gini coefficient = 1 - Sum of score = 1 - 0.64 = 0.36

Option B is correct.