Given the following tax structure, what is the minimum tax that would need to be assessed on Lizzy to make the tax progressive with respect to average tax rates? What is the minimum tax that would need to be assessed on Lizzy to make the tax progressive with respect to effective tax rates? TaxpayerSalaryMuni-Bond InterestTotal TaxMort20,0005,0004,000Lizzy80,00030,000???
What will be an ideal response?
Mort's average tax rate is 20 percent.
| Average Tax Rate | = | Total Tax | = | $4,000 | = | 20% |
| ? | ? | Total Income | ? | $20,000 | ? | ? |
A 20 percent average tax rate on Lizzy's $80,000 total income would result in $16,000 of tax (i.e., 20% × $80,000 = $16,000). Thus, Lizzy must pay more than $16,000 in tax for the tax structure to be progressive with respect to average tax rates.
Mort's effective tax rate is 16 percent.
| Effective tax rate | = | Total Tax | = | $4,000 | = | 16% |
| ? | ? | Total Income | ? | ($20,000 + $5,000) | ? | ? |
A 16 percent effective tax rate on Lizzy's $110,000 total income would result in $17,600 of tax (i.e., 16% × $110,000 = $17,600). Thus, Lizzy must pay more than $17,600 in tax for the tax structure to be progressive with respect to effective tax rates.
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