Question

Song earns $110,000 taxable income as an interior designer and is taxed at an average rate of 20 percent (i.e., $22,000 of tax). Answer the questions below assuming that Congress increases the income tax rate such that Song's average tax rate increases from 20 percent to 25 percent. 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 therefore earns only $82,500 in taxable income?

Answer 1

Answer:

Explanation:

Previously the government was earning 22000 in tax revenue but since it increased the tax rate to 25%, Song taxable income went down to $82500. Therefore now government tax revenue is

25% of 82500 = 20625

So government tax revenue decreased by 1375 ( 22000-20625)