McGraw Hill’s Essentials of Federal Taxation 2022 Edition 13th Edition by Brian Spilker Solution ma

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?
 
               Mae’s average tax rate is 6 percent.
 
               Average Tax Rate = =  = 6%
 
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