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(49)[LO3] Given the following tax structure, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to average tax rates?
(50)[LO3] Using the facts in the previous problem, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to effective tax rates?(51)[LO3, 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)$80,000 = Pretax income (1 -.25)Pretax income = $106,666.67Song will pay $26,666.67 in tax ($106,666.67 x .25). Accordingly, if the income effect is descriptive, the tax base and the tax collected will increase.(52)[LO3, LO5] Using the facts from the previous problem, what will happen to the government’s tax revenues if Song chooses to spend more time pursuing her other passions besides work in response to the tax rate change and earns only $75,000 in taxable income? What is the term that describes this type of reaction to a tax rate increase? What types of taxpayers are likely to respond in this manner?18
Chapter 1 - An Introduction to TaxIf Song only earns $75,000 of taxable income, she would pay only $18,750 of tax under the new tax structure (i.e., $75,000 x .25). Thus, the government’s tax revenues would decrease by $1,250 (i.e., $18,750 - $20,000). This is an example of the substitution effect, which may be descriptive for taxpayers with more disposable income.