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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

A hypothetical society has three income earners, and all three must pay income taxes. The taxable income of Smith is $40,000, the taxable income of Jones is $100,000, and the taxable income of Brown is $200,000.

  1. a. How much tax revenue is raised under a proportional income tax when the tax rate is 10 percent? How much is raised if the tax rate is 15 percent?
  2. b. A progressive tax system is installed with a rate of 5 percent on income of $0–$40,000, a rate of 8 percent on income from $40,001 to $100,000, and a rate of 15 percent on all income over $100,000. Will this system raise more or less tax revenue than a proportional tax rate of 10 percent? Explain your answer.

(a)

To determine

Identify the tax revenue under proportional income tax.  

Explanation

The proportional income tax structure is a method of collecting income tax in which the percentage of income paid in taxes remains the same at any income level.

Since the income of S is $40,000, J is $100,000, and S is $200,000, the total income tax revenue at the 10% tax rate can be calculated as follows:

  Tax revenue=Total income×Interest rate100=($40,000+$100,000+$200,000)×10%100=$34,000

Thus, at 10% tax rate, the income tax revenue is $34,000

(b)

To determine

Identify the tax revenue under progressive income tax.  

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