Question

According to long-run projections, under current law,
A. federal government spending as a percentage of GDP will rise gradually but substantially in the next several decades.
B. federal taxes as a percentage of GDP will rise gradually but substantially in the next several decades.
C. the federal government’s budget deficit will gradually be eliminated in the next several decades.
D. All of the above are correct.
E. B and C, only

Suppose that the government taxes income in the following fashion: 15 percent of the first $50,000, 20 percent of the next $50,000, and 25 percent of all income over $100,000. George earns $84,000, and Martha earns $92,000. Which of the following statements is correct?
(x) George's average tax rate is lower than his marginal tax rate.
(y) George's average tax rate is lower than Martha's average tax rate.
(z) George's marginal tax rate is less than Martha's marginal tax rate.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

Which of the following statements is (are) correct?
(x) Larry earned $25,000 and paid a tax liability of $3,750, Curly earned $50,000 and he had a tax liability of $7,500, but, Moe, who earned $5,000 more than Curly had to pay $8,250 in taxes. Larry, Curly and Moe are paying taxes in a system that is proportional.
(y) Thomas earned $50,000 and Jefferson earned $60,000. If the government imposes a $3,000 lump-sum tax, then the average tax rate for Thomas is 6.0% and for Jefferson it is 5.0%.
(z) Billie and Beth are neighbors. Billie earned $24,000 and paid $2,400 in taxes. If Beth earned $25,000 then she would have to pay more than $2,400 in taxes if the marginal tax is greater than zero and the tax is regressive.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

Answer 1

1. According to long-run projections, according to current law:

B. federal taxes as a percentage of GDP will rise gradually but substantially in the next several decades.

This is likely to happen as the debt increases. A current increase in borrowing would lead to it being mitigated by increased taxes in the future. This increase in taxes will aid in the repayment the money borrowed. Please look at the picture below to get a better understanding. There is a consistent increase in the federal tax as a percentage of GDP, and also a consistent increase in the debt of government. Therefore, in the simplest of terms, federal tax rates, and debt have a positive relationship, therefore, as the debt increases, the federal tax as a percentage of GDP will also increase.

As a Percentage of Gross Domestic Product Revenues 8.3 Individual income taxes 8.2 8.3 8.3 8.4 8.4 8.5 8.6 9.1 9.5 9.5 9.6 8.4 8.9 Payroll taxes Corporate income taxes 5.8 5.8 5.8 5.8 5.8 5.8 5.9 5.9 5.9 5.9 5.9 5.9 5.8 5.9 1.0 1.5 1.4 1.2 1.2 1.3 1.3 1.6 1.6 1.5 1.4 1.4 1.4 1.4 1.3 Other 1.3 1.3 1.3 1.3 1.3 1.3 1.4 1.4 1.4 1.4 1.3 1.4 1.4 17.9 18.2 16.9 Total 16.5 16.5 16.6 16.7 16.8 17.0 17.3 17.4 18.2 18.3 17.5 12.2 On-budget Off-budget 12.3 12.4 12.4 12.6 12.7 13.0 13.1 13.6 14.0 13.9 14.0 12.7 13.2 4.2 4.2 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 4.3 Outlays Mandatory Discretionary 12,7 12.8 13.6 13.9 12.5 13.0 13.6 13.5 13.9 14.2 14.3 14.9 14.6 13.3 5.4 6.2 6.3 5.8 5.7 5.5 5.3 5.2 5.2 5.1 5.0 4.9 5.5 5.3 Net interest 1.6 1.8 2.1 2.3 2.4 2.6 2.7 2.7 2.8 2.8 2.9 3.0 2.4 2.6 20.7 21.6 21.5 22.9 22.5 21.9 Total 20.3 20.7 20.9 21.5 21.9 22.1 22.3 21.2 16.5 16.3 On-budget Off-budget 16.1 16.4 16.9 16.8 16.6 16.9 17.0 17.1 17.6 17.1 16.6 16.9 4.2 4.3 4.4 4.5 4.6 4.8 4.9 5.0 5.1 5.2 5.3 5.4 4.6 5.0 Deficit (-) or Surplus On-budget Off-budget -3.9 -4.2 -4.0 -4.2 -4.7 -4.5 -4.2 -4.5 -4.3 -4.0 -4.7 -4.2 -4.3 4.3 -3.9 4.2 -3.9 4.0 -4.3 4.0 -3.6 -3.7 -3.4 3.1 -3.6 -3.1 4.0 -3.6 -0.7 -0.9 -0.1 -0.2 0.4 -0.5 -0.6 0.8 1.1 -1.2 -0.4 -0.7 84.8 Debt Held by the Public 77.8 78.2 79.5 81.0 83.0 85.9 87.2 88.5 89.4 90.8 91.8 n.a. n.a

2. B (x) & (y) only

(x) because any given individuals average tax rate will always be lower than their marginal tax rate.

(y) because with the information we can calculate the average tax rate of George to be 17.02% and Marthas average tax rate to be 17.28%

We discard (z) because we do not have enough information to calculate the marginal tax rate. As we would require a change in tax paid, and a change in taxable income, both of which are not provided in the question. Plus both George and Martha belong to the same tax brackets.

Marginal tax rate is calculated using the formula:

$Marginal\;Tax\;=\;\frac{\Delta Tax\;Payable}{\Delta Taxable\; Income}$

3.  B. (x) and (y) only

(x) is true because all the individuals are taxed at a standard rate of 15%. When the tax rate remains the same, even though the income increases it is categorized as a proportional tax system.

(y) is true because if the lump-sum tax is $3000 then Thomas and Jefferson would pay 6% and 5% respectively.

We do not include (z) because we if the tax system was regressive then Beth would have to pay less than $2400, as in a regressive system, as the income increases the tax paid decreases.