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ㄨˇ眠McGraw-Hll Educabon >y! Connect newconnect mheducation.com/t imported Frem If ■imported From Fire· Domain ManagerCheap0omaincems Studentloas.gov On Campus&Dey Universa Homework Help Save a Problem 1-50 (LO 1-3, LO 1-5) Song earns $152,500 taxable income as an interior designer and is taxed at an average rate of 15 percent (0e $22.875 of tax) o. If Congress increases the income tax rate such that Song’s average tax rate increases from 15 percent to 20 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) S 26,170 00 b If the income effect is descriptive, the tax base and the tax collected will increase True False Prex Next DEL /O
Expert Answer
a. Under the current income tax, Song has $129,625 of income after tax. If the income effect is descriptive andCongress increases tax rates so that Song’s average tax rate is 20 percent, Song will need to earn to $162,031.25 to continue to have $129,625 of income after tax.
After-tax income = Pretax income (1 − tax rate)
$129,625 = Pretax income (1 −.20)
Pretax income = $162,031.25
Song will pay $32,406.25 in tax ($162,031.25 × .20). Accordingly, if the income effect is descriptive, the tax base and the tax collected will increase.
$32,406.25 − $22,875 = $9,531.25
b. True
