Question

Congress would like to increase tax revenues by 6.5 percent. Assume that the average taxpayer in the United States earns $57,000 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 6.5 percent increase in tax revenues? (Round your answer to 2 decimal places.) b. This is an example of what type of forecasting? Static Dynamic

Answer 1

Let us say the current revenue of Congress government be = x, Now the proposed revenue is to be increased by 6.5%.

So equation for earning proposed income would be, x + 0.065x = 1.065x --------- (Equation 1).

Further currently income from taxpayers is 20% of $57000 = $11400 ---------- (Equation 2).

So equating the above two equations the presentation would be as follows :

1.065x = $11400

So, therefore value of x from above = $10704 (rounded off to two decimal places)

So the total tax on income after adding the above = $11400 + $10704 = $22104

Therefore above tax revenue expressed in form of percentage would be = ($22104 / $57000)*100 = 38.78%.

So the proposed tax rate fixed by Congress should be 38.78% for increase in revenue from proposed.