Question

Song earns $275,000 taxable income as an interior designer and is taxed at an average rate of 20 percent (i.e., $55,000 of tax).a. 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? (Round your intermediate calculations and final answer to 2 decimal places.) b. If the income effect is descriptive, the tax base and the tax collected will increase.true/false

Answer 1

Answer:

a) $18333.33 has been paid more as income tax

b) True

Explanation:

Given:

Current Taxable income earned = $275,000

Current Tax rate = 20%

Current tax amount = $55,000

Therefore,

The current after tax income = Taxable income - Tax paid

or

The current after tax income = $275,000 - $55,000 = $220,000

Now,

After-tax income = Pretax income (1 – tax rate)

or

$220,000 = Pretax income (1 - 0.25)

or

Pretax income = $293333.33

Therefore, the tax paid = Pretax income - after tax income

the tax paid = $293333.33 - $220,000 = $73333.33

b) True. the tax collected has increased by ( $73333.33 - $55,000 )

= $18333.33