   Chapter 11, Problem 5WNG

Chapter
Section
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. 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? 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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