Question

Problem 1-50 (LO 1-3, LO 1-5) Song earns $100,000 taxable income as an interior designer and is taxed at an average rate of 20 percent (ie. $20,000 of tax). Answer the questions below assuming that Congress increases the income tax rate such that Song's average tax rate increases from 20 percent to 25 percent. 6. What will happen to the government's tax revenues if Song chooses to spend more time pursuing her other passions besides work! in response to the tax rate change and therefore earns only $75,000 in taxable income? SO Government's tax revenues would decrease by $1,250 Government's tax revenues would increase by $1,250 Government's tax revenues would decrease by $1,500 Government's tax revenues would increase by $1,500 Government's tax revenues would remain unchanged b. What is the term that describes this type of reaction to a tax rate increase? Price effect Substitution effect Budget constraint Income effect Endowment effect c. What types of taxpayers are likely to respond in this manner? Taxpayers with less disposable income Taxpayers with more disposable income

i keep getting the wrong answers

Answer 1

(a) -- What will happen to the government's tax revenues if Song chooses to spend more time pursuing her other passions besides work in response to the tax rate change and earns only $75,000 in taxable income?

Answer -

	Explanation
Government's tax revenues would decrease by $1250	If Song only earns $75000 of taxable income, she would pay only $18750 ($75000*25%) of tax under the new tax structure. Thus, the government’s tax revenues would decrease by $1250 [$18750 - ($100000 * 20%)]

Hence, Option - (A) is Correct.

.

(b) -- What is the term that describes this type of reaction to a tax rate increase?

Answer -

Option - (B) - Substitution effect, is Correct.

.

(c) -- What types of taxpayers are likely to respond in this manner?

Answer -

Option - (B) - Taxpayers with more disposable income, is Correct.