(53) [LO5] Given the following tax structure, what tax would need to be assessed on Venita to make the tax horizontally equitable? Taxpayer Salary Total Tax Mae 10,000 600 Pedro 20,000 1,500 Venita 10,000 ??? Horizontal equity means that two taxpayers in similar situations pay the same tax. Thus, to make the tax structure horizontally equitable, Venita should pay $600 in tax. (54) [LO5] Using the facts in the previous problem, what is the minimum tax that Pedro should pay to make the tax structure vertically equitable based on the tax rate paid? This would result in what type of tax rate structure? Mae’s average tax rate is 6 percent. Average Tax Rate = = = 6% To be vertically equitable with respect to tax rates, Pedro should pay a tax rate higher than 6 percent. A 6 percent tax rate on Pedro’s $20,000 taxable income would result in $1,200 of tax (i.e., 6% x $20,000 = $1,200). Thus, Pedro must pay more than $1,200 tax (e.g., $1,201) for the tax structure to be vertically equitable (i.e., to generate a tax rate more than 6 percent).
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