Mr. and Mrs. Jerald own a dry cleaning business that generates $125,000 taxable income each year. For the past few years, the couple’s federal tax rate on this income has been 32 percent. Congress recently increased the tax rate for next year to 40 percent. Required: Based on a static forecast, how much additional revenue will the federal government collect from Mr. and Mrs. Jerald next year? How much additional revenue will the government collect if Mr. and Mrs. Jerald respond to the rate increase by working harder and earning $140,000 next year? How much additional revenue will the government collect if Mr. and Mrs. Jerald respond to the rate increase by working less and earning only $110,000 next year?

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sebastiansierraocm sebastiansierraocm · Answer 1 · 2020-09-24T03:44:22+02:00

Answer:

The initial tax revenue that the government obtained from the couple was:

$125,000 x 32% = $40,000

With the new tax rate, the federal government will obtain:

$125,000 x 40% = $50,000

So, next year, the additional tax revenue will be $10,000

Now, if the Jeradls work harder and earn $140,000, the federal government would get:

$140,000 x 40% = $56,000

So in this case, the additional tax revenue would be $16,000 when compared to previous years.