Effective tax rate = = = 3% A 3 percent effective tax rate on Shameika’s $80,000 total income would result in $2,400 of tax (i.e., 3% x $80,000 = $2,400). Thus, Shameika must pay more than $2,400 tax (e.g., $2,401) for the tax structure to be progressive with respect to effective tax rates. (51) [LO5] Song earns $100,000 taxable income as an interior designer and is taxed at an average rate of 20 percent (i.e., $20,000 of tax). If Congress increases the income tax rate such that Song’s average tax rate increases from 20 percent to 25 percent, how much more income tax will she pay assuming that the income effect is descriptive? What effect will this tax rate change have on the tax base and tax collected? Under the current income tax, Song has $80,000 of income after tax. If the income effect is descriptive and Congress increases tax rates so that Song’s average tax rate is 25 percent, Song will need to earn to $106,666.67 to continue to have $80,000 of income after tax. After-tax income = Pretax income (1 – tax rate)
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This note was uploaded on 04/04/2012 for the course ACCT 26373 taught by Professor Hall during the Spring '10 term at Texas State.