Given the following tax structure, what amount of tax would need to be assessed on Carrie to make the tax horizontally equitable? What is the minimum tax that Simon should pay to make the tax structure vertically equitable based on Fantasia's tax rate? This would result in what type of tax rate structure? TaxpayerSalaryTotal TaxFantasia20,0001,500Simon30,0002,000Carrie20,000???
What will be an ideal response?
Horizontal equity means that two taxpayers in similar situations pay the same tax. Thus, to make the tax structure horizontally equitable, Carrie should pay $1,500 in tax.
Fantasia's average tax rate is 7.5 percent.
| Average Tax Rate | = | Total Tax | = | $1,500 | = | 7.5% |
| ? | ? | Taxable Income | ? | $20,000 | ? | ? |
To be vertically equitable with respect to tax rates, Simon should pay a tax rate higher than 7.5 percent. A 7.5 percent tax rate on Simon's $20,000 taxable income would result in $2,250 of tax (i.e., 7.5% × $20,000 = $2,250). Thus, Simon must pay more than $2,250 in tax for the tax structure to be vertically equitable (i.e., to generate a tax rate more than 7.5 percent). This would result in a progressive tax rate structure.
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