Question

Mr. and Mrs. Jerald own a dry cleaning business that generates $156,750 taxable income each year. For the past few years, the couple’s federal tax rate on this income has been 32 percent. Congress recently increased the tax rate for next year to 40 percent.

Required:

1. Based on a static forecast, how much additional revenue will the federal government collect from Mr. and Mrs. Jerald next year?
2. How much additional revenue will the government collect if Mr. and Mrs. Jerald respond to the rate increase by working harder and earning $171,750 next year?
3. How much additional revenue will the government collect if Mr. and Mrs. Jerald respond to the rate increase by working less and earning only $141,750 next year?

could you explain how you got the answer? Thank you.

Answer 1

1. Current Year Income of Mr and Mrs Jerald = $156,750

Tax Rate in current year = 32%

Total Tax revenue of the government (current year ) when tax rate is 32% = 156,750 * 0.32= 50,160

Now Congress proposed to increase federal tax rate to 40% next year

Total Tax revenue earned by the government next year when tax rate is 40% = 156,750 * 0.40= 62,700

Additional Tax revenue earned by government because increase tax rate = 62,700 – 50,160= 12,540 $

2. When the income of Mr and Mrs Jerald increased to $ 1,71,750 next year

Tax rate applicable next year = 40%

Tax revenue earned by the government (next year) when tax rate is 40% = 171,750 * 0.4 = 68700

Total Tax revenue of the government (current year) when tax rate is 32% = 156,750 * 0.32= 50,160

Additional Tax revenue earned by government = 68,700 – 50,160 = 18,540 $

3. When the income of Mr and Mrs Jerald is $ 141,750 next year

Tax rate applicable next year = 40%

Tax revenue earned by the government (next year) when tax rate is 40% = 141,750 * 0.4 = 56,700

Total Tax revenue of the government (current year) when tax rate is 32% = 156,750 * 0.32= 50,160

Additional Tax Revenue earned by the government = 56,700 – 50,160 = $ 6,540

Analysis of third question : It can be concluded   that even though there is decrease in income of the couple but due to increase tax rate their tax payment will increased as in comparison to previous years.