Question

A city government imposes a proportional income tax on all people who earn income within its city limits. In 2004, the city's income tax rate was 0.04 (4 percent), and it collected $20.00 million in income taxes. In 2005, it raised the income tax rate to 0.05 (5 percent), and its income tax collections declined to $19.20 million. What happened to the city's income tax base between 2004 and 2005?A. it fell by $0.80 million.B. it fell by $116 millionC. it ross by $116 millionD. it cannot be determined since the tax rate changed

Answer 1

B) it fell by $116 million

Step-by-step explanation:

If during 2004 the city was able to raise $20 million with a 4% income tax, then the city's income base was:

($20 million / 4%) x 100 = $500 million

If during 2005 the city was only able to raise $19.20 million with a 5% income tax, then the city's income base lowered to:

($19.20 million / 5%) x 100 = $384 million

This means that the city's income base was reduced by $116 million (= $500 million - $384 million)