Question & Answer

Given the following tax structure, what tax would need to be assessed on Venita to make the tax horizontally equitable?

Using the facts from problem 50, 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 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?

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

 Using the facts in problem 48, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to effective tax rates?

Given the following tax structure, what minimum tax would need to be assessed on Shameika to make the tax progressive with respect to average tax rates?

Using the facts in problem 46, what interest rate does the State of New York need to offer to make Fergie indifferent between investing in the two bonds?

Fergiehas the choice between investing in a State of New York bond at 5 percent and a Surething bond at 8 percent.  Assuming that both bonds have the same nontax characteristics and that Fergie has a 30 percent marginal tax rate, in which bond should she invest?

Using the facts in problem 44, what interest rate does Surething Inc. need to offer to make Hugh indifferent between investing in the two bonds?

Hugh has the choice between investing in a City of Heflin bond at 6 percent or a Surething bond at 9 percent.  Assuming that both bonds have the same nontax characteristics and that Hugh has a 40 percent marginal tax rate, in which bond should he invest?

Melindainvests $200,000 in a City of Heflin bond that pays 6 percent interest.  Alternatively, Melindacould have invested the $200,000 in a bond recently issued by Surething Inc. that pays 8 percent interest with similar risk and othernontax characteristics to the City of Heflin bond.  Assume Melinda’s marginal tax rate is 25 percent. 

Using the facts in problem 41, if Scot and Vidia earn an additional $70,000 of taxable income, what is their marginal tax rate on this income?  How would your answer differ if they, instead, had $70,000 of additional deductions?

Scot and Vidia, married taxpayers, earn $240,000 in taxable income and $5,000 in interest from an investment in City of Tampa bonds.  Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe?  What is their average tax rate?  What is their effective tax rate?  What is their current marginal tax rate?

Using the facts in problem 39, if Jorge and Anita earn an additional $100,000 of taxable income, what is their marginal tax rate on this income?  What is their marginal rate if, instead, they reported an additional $100,000 in deductions?

Jorge and Anita, married taxpayers, earn $150,000 in taxable income and $40,000 in interest from an investment in City of Heflin bonds.  Using the U.S. tax rate schedule for married filing jointly, how much federal tax will they owe?  What is their average tax rate?  What is their effective tax rate?  What is their current marginal tax rate?

Using the facts in problem 37, if Campbell earns an additional $15,000 of taxable income, what is her marginal tax rate on this income?  What is her marginal rate if, instead, she had $15,000 of additional deductions?

Campbell, a single taxpayer, earns $400,000 in taxable income and $2,000 in interest from an investment in State of New York bonds.  Using the U.S. tax rate schedule, how much federal tax will she owe?  What is her average tax rate?  What is her effective tax rate?  What is her current marginal tax rate?

In reviewing the tax rate schedule for a single taxpayer, Chuck notes that the tax on $75,000 is $5,226.25 plus 25 percent of the taxable income over $37,950.  What does the $5,226.25 represent?

Using the facts in problem 34, if Chuck earns an additional $40,000 of taxable income, what is his marginal tax rate on this income?  What is his marginal rate if, instead, he had $40,000 of additional deductions?

Chuck, a single taxpayer, earns $75,000 in taxable income and $10,000 in interest from an investment in City of Heflin bonds.  Using the U.S. tax rate schedule, how much federal tax will he owe?  What is his average tax rate?  What is his effective tax rate?  What is his current marginal tax rate?

“The federal income tax scores very high on the economy criterion because the current IRS budget is relatively low compared to the costs of a typical collection agency.”  Explain why this statement may be considered wrong.

Many years ago a famous member of Congress proposed eliminating federal income tax withholding.  What criterion for evaluating tax systems did this proposal violate?  What would likely have been the result of eliminating withholding?

Compare the federal income tax to sales taxes using the “certainty” criterion.

Discuss why evaluating vertical equity simply based on tax rate structure may be less than optimal.

Montel argues that a flat income tax rate system is vertically equitable.  Oprah argues that a progressive tax rate structure is vertically equitable.  How do their arguments differ?  Who is correct?

What is the difference between horizontal and vertical equity?  How do tax preferences affect people’s view of horizontal equity?