Tax plan for the Republic of Vadar

Personal Income Tax and Revenue Forecasting.

When the Soviet Union bloc broke up in the early 1990's, the Republic of Vadar declared its independence. As the country established a monetary system, democratic processes, and a controlled fiscal system, the early problems of hyperinflation, unemployment, and declining standards of living slowly subsided. In late 1997 the country initiated a personal income tax, heavily dependent on taxes withheld by large employers on wages and salaries, but still broad in coverage. The country has been collecting about 30 percent of its tax revenue from the tax, although a law passed in 2000 was expected to reduce personal income tax collections by 25 percent in the short term. The lower tax rates are expected to stimulate economical activity and to encourage business to move from shadow to the official (taxpaying) economy, so some of the revenue loss will ultimately be recovered. The Ministry of Finance forecasts collections of $7,789,000.00 thousand markka (MK) for 2001.

The data on tax collections are reported below.

1998 1999 2000 2001
January 668,534.0 625,149.1 559,070.9 714,981.0
February 782,026.6 754,396.9 874,000.0 575,115.0
March 738,856.7 811,506.7 988,047.2 583,592.0
April 826,622.9 880.075.8 916,030.7 586,743.0
May 678,031.1 756,507.9 800,876.8
June 736,974.5 831,054.5 940,975.1
July 824,343.7 978,485.6 967,098.4
August 668,708.8 743,718.4 841,267.5
September 766,271.3 898,210.0 874,308.1
October 759,679.8 846,494.2 887,091.4
November 742,371.5 847,950.2 936,090.7
December 984,911.2 1,259,467.1 1,204,961.7

(1) Describe the pattern you see in the tax data given.

(2) Explain with examples whether you know enough to advise the ministry whether or not to revise their 2001 forecast.

(3) Describe and justify your recommendation. If not, describe what further information you need.

(4) Based upon the data given, how much tax revenue do you predict will be collected May 2001? Explain your reasoning.