1.You are interested in estimating the effects of tax breaks on the level of cha
ID: 368266 • Letter: 1
Question
1.You are interested in estimating the effects of tax breaks on the level of charitable contribution. How could observing changes over time in tax rates & associated charitable contribution levels help you to distinguish between marginal & inframarginal effects of the tax break? Are there provisions in either the Senate or House bill that may impact the level of giving by certain taxpayers?
2.Congress proposes reducing the tax exemption for children in married families where only one parent works outside the home. Why would this proposal improved equity, from a Haig-Simmons perspective?
3.Gale and Scholz (1994) estimate that increasing the contribution limits for IRAs would have little effect on the overall rates of savings. Why do you think this might be the case? Are there any changes being proposed as part of tax reform relating to IRA’s?
4.Why does the property tax, as implemented in this country, provide a disincentive for property owners to improve their property? How would a land tax alter these incentives?
Explanation / Answer
1.You are interested in estimating the effects of tax breaks on the level of charitable contribution. How could observing changes over time in tax rates & associated charitable contribution levels help you to distinguish between marginal & inframarginal effects of the tax break? Are there provisions in either the Senate or House bill that may impact the level of giving by certain taxpayers?
The effective tax rate is the percentage of your taxable income that you effectively pay in taxes where as The marginal tax rate is the percentage of tax that you will pay on your next dollar of taxable income
Example- for Bill is that any income in addition to his base $50,000 salary will be taxed at 25% (up to $89,350). So if Bill gets a raise to $60,000, that extra $10,000 will be taxed at 25% and Lindsay will get $7,500 in after-tax money from her $10,000 raise.
Now let’s look at how Bill’s $60,000 income is taxed if he files as a single person. This will allow us to determine his effective tax rate.
1. Bill’s first $9,075 of income is taxed at 10%, for a tax liability of $907.50.
2. Bill’s income over $9,075 and up to $36,900, is taxed at 15%. This bracket of income leaves a tax liability of $4,173.75.
3. Bill’s income above $36,900, up to $89,350, is taxed at 25%. This leaves $23,100 ($60,000 - $36,900) of income that will be taxed at 25%. This bracket’s tax liability is $5,775.
To find Bill’s total tax we add the $907.50 in taxes from step 1, the $4,173.75 from step 2, and the $5,775 from step 3. This gives Lindsay a total tax liability of $10,856.25.
Now Bill owes $10,856.25 in taxes on his income of $60,000.
Taxes owed ($10,856.2) divided by taxable income ($60,000) is 17.6%, so Bill’s effective tax rate is 18.09%
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