Question

Song earns $210,000 taxable income as an interior designer and is taxed at an average rate of 25 percent (i.e., $52,500 of tax). a. If Congress increases the income tax rate such that Song’s average tax rate increases from 25 percent to 30 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

a. If Congress increases the income tax rate such that Song’s average tax rate increases from 25 percent to 30 percent, how much more income tax will she pay assuming that the income effect is descriptive?

Song earns $210,000 taxable income as an interior designer

Average tax rate of 25%

Therefore; Current tax paid = $210,000 * 25% = $52,500

And after tax income of Song = $210,000 - $52,500 = $157,500

Now if Congress increases the income tax rate such that Song’s average tax rate increases from 25% to 30% and assuming that the income effect is descriptive

First we have to calculate that how much new total income Song required to have after-tax income of $157,500; where

After-tax income = New Pre-tax Income * (1-new tax rate)

$157,500 = New Pre-tax Income * (1-30%)

New Pre-tax Income = $157,500/ (1-30%) = $225,000

Therefore new tax paid = New Pre-tax Income * new tax rate

= $225,000 * 30% = $67,500

Therefore additional income tax she will pay = new tax paid - Current tax paid

= $67,500 -$52,500

= $15,000.00

b. If the income effect is descriptive, the tax base and the tax collected will increase.

This statement is true

As we can see in part a. that if the income effect is descriptive, the tax base and the tax collected will increase.