After-tax income = Pretax income (1 – tax rate)
$80,000 = Pretax income (1 -.25)
Pretax income = $106,666.67
Song 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.
[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?