Question

Suppose taxpayers are required to pay a base tax of $50 plus 30 percent on any income over $100, as in the initial tax system B in the table below. Suppose further that the taxing authority wishes to raise by $40 the taxes of people with incomes of $200.

Tax System B
Initial Tax Schedule	Tax on Income of $200	Tax rate		Disposable Income
		Average	Marginal
$50 + 30% of income over $100	$80	40%	30%	$120

(a) If marginal tax rates are to remain unchanged, what will the new base tax have to be?

Instructions: Enter your response as a whole number.

$

(b) If the base tax of $50 is to remain unchanged, what will the marginal tax rate have to be?

%

Answer 1

a) If marginal tax rate remains unchanged, the base tax have to be increase by from $ 50 to $ 90 (50+40).

Tax System B (New)
Initial Tax Schedule	Tax on Income of $200	Tax rate		Disposable Income
		Average	Marginal
$90 + 30% of income over $100	$120	60%	30%	$80

b) If base tax remains at $ 50, marginal tax rate need to be increase by 40% to 70% to increase total tax payable by $ 40 for people with income of $ 200.

Tax System B (New)
Initial Tax Schedule	Tax on Income of $200	Tax rate		Disposable Income
		Average	Marginal
$50 + 70% of income over $100	$120	60%	70%	$80