McGraw Hill’s Taxation of Individuals 2022 Edition 13th Edition by Brian Spilker Solution manual
Mihwah’s average tax rate is 6 percent.
Average Tax Rate =
A 6 percent average tax rate on Shameika’s $50,000 taxable income would result in $3,000 of tax (i.e., 6% × $50,000 = $3,000). Thus, Shameika must pay more than $3,000 tax (e.g., $3,001) for the tax structure to be progressive with respect to average tax rates.
- [LO 3] Using the facts in Problem 47, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to effective tax rates?
Mihwah’s effective tax rate is 3 percent.
Effective tax rate =
A 3 percent effective tax rate on Shameika’s $80,000 total income would result in $2,400 of tax (i.e., 3% × $80,000 = $2,400). Thus, Shameika must pay more than $2,400 tax (e.g., $2,401) for the tax structure to be progressive with respect to effective tax rates.
- [LO 3, LO 5] 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 = $106,666.67
Song will pay $26,666.67 in tax ($106,666.67 × .25). Accordingly, if the income effect is descriptive, the tax base and the tax collected will increase.
The additional income tax is $26,666.67 − $20,000 = $6,666.67
- [LO 3, LO 5] Using the facts from Problem 49, 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 therefore 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?
If 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 × .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.
- [LO 5] Given the following tax structure, what tax would need to be assessed on Venita to make the tax horizontally equitable?
Taxpayer Salary Total Tax
Mae 10,000 600
Pedro 20,000 1,500
Venita 10,000 ???
Horizontal equity means that two taxpayers in similar situations pay the same tax. Thus, to make the tax structure horizontally equitable, Venita should pay $600 in tax.
- [LO 5] Using the facts in Problem 51, what is the minimum tax that Pedro should pay to make the tax structure vertically equitable based on the tax rate paid? This would result in what type of tax rate structure?