Question

3. In 2012, the Obama administration proposed a set of policies that would have increased the...

3. In 2012, the Obama administration proposed a set of policies that would have increased the top income tax rate from 35 percent to approximately 44 percent. By what proportion would this increase the excess burden of the income tax for people in this tax bracket? (Hint: Use the formula for excess burden to answer this question.)

Homework Answers

Answer #1

Excess burden = Deadweight cost, or, deadweight loss

Excess burden is directly proportional to the square of the tax rate. Cost of taxation exceeds the taxes raised.

1/2 * 0.25* 9 = 1.25

Tax rates are 35, and, 44 percent respectively. This is the change in tax rate per annum.

We calculate this using dwl = 1/2 * (9/35) * 9

It can be measured using the marginal cost of fund, or, an average cost of fund

As the Bush administration's tax cuts expire, for individuals earning more than $200000; raising the tax rate from 35 percent to 39.6 percent. The tax rate exceeds 44 percent; after stripping of deductions, and, when the new Medicare tax on investment income is increased.

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