Question

Song earns $175,000 taxable income as an interior designer and is taxed at an average rate of 25 percent (i.e., $43,750 of tax).

a. if congress increases the income tax rate such that song's average tax rate increases from 25 percent to 35 percent, how much more income tax will she pay assuming that the income effect is descriptive?

Answer 1

Calculation of additional income tax to be paid by Song after an increase in the tax rates:

Song earns taxable income of $175,000 and the increase in the tax rate is 10% (25% to 35%), hence the additional income tax to be paid by Song after an increase in the tax rates shall be 175000*10% = $17,500

Now, Song used to pay $43,750 of tax on the same income before the increase in tax rates, but now she has to pay an additional tax of $17,500. So we can say that the percentage increase in her tax amount shall be = 17500/43750 =0.4= 40%