McGraw Hill’s Taxation of Individuals 2022 Edition 13th Edition by Brian Spilker Solution manual
Mae’s average tax rate is 6 percent.
Average Tax Rate =
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% × $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). This would be a progressive structure since the structure imposes an increasing marginal tax rate as the tax base increases.
- [LO 5] Using the facts in Problem 51, what is the minimum tax that Pedro should pay to make the tax structure vertically equitable with respect to the amount of tax paid? This would result in what type of tax rate structure?
To be vertically equitable with respect to the amount of tax paid, Pedro should pay more in tax dollars than Mae because he earns more taxable income than her. A strict interpretation of this definition would suggest that the tax is vertically equitable if Pedro pays 1 more dollar in tax than Mae (i.e., $601). However, this would result in a regressive tax structure (which most people would argue is not vertically equitable). A less strict interpretation of vertical equity (based on dollar amounts) is that Pedro should pay more tax than Mae but at the same tax rate (i.e., a proportional or flat tax rate structure).
- [LO 5] Consider the following tax rate structure. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?
Taxpayer Salary Total Tax
Rajiv 10,000 600
LaMarcus 20,000 600
Dory 10,000 600
The tax rate schedule is horizontally equitable because those taxpayers in the same situation (Rajiv and Dory) pay the same tax ($600). The tax is not vertically equitable because the taxpayer with a greater ability to pay (LaMarcus) does not pay more tax, nor does he pay a higher tax rate.
- [LO 5] Consider the following tax rate structure. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?
Taxpayer Salary Total Tax
Marilyn 10,000 600
Kobe 20,000 3,000
Alfonso 30,000 6,000
We cannot evaluate whether the tax rate structure is horizontally equitable because we are unable to determine if taxpayers in similar situations pay the same tax (i.e., the problem does not give data for two taxpayers with the same income). The tax rate structure would be considered vertically equitable because taxpayers with higher income pay more tax and at a higher rate. Specifically, Marilyn’s, Kobe’s, and Alfonso’s average tax rates are 6 percent, 15 percent, and 20 percent, respectively.
- [LO 5] Consider the following tax rate structure. Is it horizontally equitable? Why or why not? Is it vertically equitable? Why or why not?
Taxpayer Salary