a. If Song earns only $75,000 in taxable income, the government's tax revenues will be $18,750 ($75,000 x 25%) and <u>a. Government's tax revenues would decrease by $1,250.</u>
b. The term that describes this type of reaction to a tax rate increase is <u>d. Income effect.</u>
c. The taxpayers that will likely respond in this manner are <u>b. Taxpayers with more disposable income.</u>
<h3>Data and Calculations:</h3>
Song's taxable income per year = $100,000
Average tax rate = 20%
Tax liability per year = $20,000 ($100,000 x 20%)
<h3>New Tax Regime:</h3>
Tax rate = 25%
New taxable income of Song = $75,000
Tax liability = $18,750 ($75,000 x 25%)
Thus, if the tax rate is increased from 20% to 25% forcing Song to reduce his taxable income to $75,000, <u>a. Government's tax revenues would decrease by $1,250.</u>
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