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home / study / business / accounting / accounting questions and answers / Congress Would Like To Increase Tax Revenues By 17 Percent. Assume That The Average Taxpayer ... Your question has been answered Let us know if you got a helpful answer. Rate this answer . Question: Congress would like to increase tax revenues by 17 percent. Assume that the average taxpayer in t... Congress would like to increase tax revenues by 17 percent. Assume that the average taxpayer in the United States earns $52,000 and pays an average tax rate of 20 percent. a. If the income effect is in effect for all taxpayers, what average tax rate will result in a 17 percent increase in tax revenues

a. If the income effect is in effect for all taxpayers, what average tax rate will result in a 17 percent increase in tax revenues

Answer 1

Answer

This analysis is an example of dynamic forecasting.Based on the information above,the average taxpayer pays $10,400 of tax (i.e., $52,000 x20% ), leaving $41,600 of incomeafter tax.A 17 percent increase in revenues would mean that the average taxpayer pays$12,168 in tax ($10,400 x 1.17).With this new tax amount, we can solve for the tax rate that would generate this tax amount.

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

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

After-tax income = Pretax income - Tax

Substituting information from the problem results in:

$41,600 = Pretax income - $12,168

Pretax income = $53,768

We can use the above formula to solve for the new tax rate.

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

$41,600 = $53,768 x (1 – tax rate)

Tax rate = $12,168/$53,768

Tax rate= 22.63%