See exhibit 14 4 progressive income taxation a

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Unformatted text preview: oday think that Lithuania’s flat tax of 33 percent is too high. (See Exhibit 14-4.) Progressive Income Taxation A progressive income tax is a tax that people pay at a higher rate as their income levels rise. Suppose that Davidson pays taxes at the rate of 10 percent on a taxable income of $10,000. When his income doubles to $20,000, he pays at a rate of 12 percent. A progressive income tax is usually capped at some tax rate; it rises to some rate and then stops. For instance, perhaps no one will pay at a rate higher than 35 percent, no matter how high his or her income. The United States has a progressive income tax structure. For example, in 2005, the tax rates were 10, 15, 25, 28, 33, and 35 percent. If you would like to find out whether the tax rate structure is the same today, go to and key in “tax rates” in the Search box. A list of documents will then come up. Pick the document that specifies the tax rates for the current year, such as tax rates for 2006. 2005 Regressive Income Taxation A flat tax is the same type of tax as which of the three taxes described in Exhibit 14-3? If the U.S. government switched from its current tax structure to a flat tax, do you think it would see tax revenues rise, fall, or stay the same? Explain. 370 Chapter 14 Taxing and Spending With a regressive income tax, people pay taxes at a lower rate as their income levels rise. For example, Lowenstein’s tax rate is 10 percent when her income is $10,000 and 8 percent when her income rises to $20,000. 14 (364-389) EMC Chap 14 11/18/05 10:58 AM Do Tax Rates Affect Athletic Performance? ?????????????????? O n Sunday, May 29, 2005, Danica Patrick became the first woman to lead the Indianapolis 500 and the highest-finishing (fourth) woman in the race’s history. Leading as late as Lap 193 in the 200-lap race, Patrick’s winnings that day were $378,855. As of June 2005, her racing winnings totaled $613,755. Now let’s turn to Maria Sharapova, tennis star, who on June 13, 2005, was ranked second in the World Tennis Association rankings. Her tennis prize money as of that day (in 2005) was $1,012,721. (Her income was much higher for 2005 if we take into account endorsements.) By the standards of most people, both Danica Patrick and Maria Sharapova were having a good year in 2005. Both were earning quite a bit of money. However, money earned and money kept are two different things. One can earn a million dollars, but because of taxes, one doesn’t keep a million dollars. If we calculate Danica Patrick’s taxes on her total winnings of $613,755 (as of a certain date), and Sharapova’s taxes on $1,012,721, what would they be? Page 371 Because we do not know the financial particulars of either of these women athletes, we have to make some rough estimates. For example, we do not know the actual dollar deductions or exemptions for either person, so we will assume that each takes the $5,000 standard deduction and the $3,200 personal exemption only, for a total of $8,200 for each person. If we subtract this dollar amount from Patrick...
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