Economics_Ch14

# Now if we consult the 2005 irs tax table we learn

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Unformatted text preview: ’s winnings (as of June 2005), it leaves her with a taxable income of \$605,555. Now if we consult the 2005 IRS tax table, we learn that for anyone who earns more than \$326,450 a year, she must pay in federal income taxes “\$94,727.50 plus 35 percent of everything over the amount of \$326,450.” Danica Patrick owes taxes equal to \$94,727.50 + 0.35(605,555 – \$326,450). Her tax liability amounts to \$192,414.25. If we subtract this amount from her gross earnings of \$613,755, Danica Patrick is left with \$421,340.75. What about Sharapova? If we subtract our \$8,200 in deductions and exemptions from her gross tennis earnings (as of a certain date), we are left with a taxable income of \$1,004,521. Her tax liability is \$94,727.50 + 0.35(1,004,521 – \$326,450), or \$332,052.35. If we subtract her tax liability from her gross income of \$1,012,721, her after-tax income is \$680,668.65. Keep in mind, also, that we did not calculate the state income tax that both Patrick and Sharapova might have to pay. Our after-tax dollar amounts are higher than they would be after state income taxes were paid. Both Danica Patrick and Maria Sharapova, you will notice, had to pay in taxes 35 percent of everything they earned over \$326,450. For every dollar they earn over this amount, 35 cents has to be paid in taxes to the federal government. Suppose that Sharapova is playing tennis and the winning prize is \$1 million. As she is playing tennis, she ought to think of a prize somewhat smaller. How much smaller? Thirty-five percent smaller— the prize for her, after she pays her taxes on the \$1 million prize, would be \$650,000. Suppose Danica Patrick and Maria Sharapova had to pay 70 cents out of every dollar earned over \$326,450. Do you think it would affect Patrick’s desire to race cars or Sharapova’s desire to play tennis? Explain your answer. THINK ABOUT IT Section 1 Taxes 371 14 (364-389) EMC Chap 14 11/18/05 10:58 AM Page 372 QUESTION: I know the federal income tax in the United States is progressive, but aren’t some taxes in the United States regressive? Do some taxes “hit” poor people harder than rich people? ANSWER: A state sales tax is an example of a tax that is regressive. To understand this concept, suppose a state sales tax is 6 percent. In other words, for every \$1 purchase, a person will pay 6 cents in state sales tax. Now suppose that two individuals, A and B, each buy a \$1,000 computer. Both will end up paying a state sales tax of \$60. Because A has a larger income than B has, A will pay a smaller percentage of A’s income in sales taxes than B will. For example, if A’s income is \$5,000 a month and B’s income is \$3,000 a month, then \$60 is 1.2 percent of \$5,000, but it is 2.0 percent of \$3,000. This exhibit shows the number of days an average taxpayer has to work to pay his or her taxes in selected years. In 1980 it was 112 days. In 2005 it was 107 days. EXHIBIT 14-5 How Long Do You Have to Work to Pay All Your Taxes? Individuals, then, pay an assortment of taxes to the federal, state, and l...
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