Junior Earns $80,000 Taxable Income as a Regional Circuit Stock

question 50

Essay

Junior earns $80,000 taxable income as a regional circuit stock car driver and is taxed at an average rate of 25 percent (i.e., $20,000 of tax). If Congress increases the income tax rate such that Junior's average tax rate increases from 25 percent to 30 percent, how much more income tax will he pay assuming that the income effect is larger than the substitution effect? What effect will this tax rate change have on the tax base and tax collected? What will happen to the government's tax revenues if Junior chooses to spend more time pursuing his other passions besides work (e.g., earns only $60,000 in taxable income)in response to the tax rate change? What is the term that describes this type of reaction to a tax rate increase? (Round your answers to two decimal places.)

---

Definitions:

Prostaglandins

Natural substances made by the cells in the endometrium and other parts of the body. High levels in women can cause dysmenorrhea.

Uterine Contractions

The tightening and relaxing of the uterine muscles, typically occurring during childbirth, menstruation, or sometimes spontaneously.

Vernix

A greasy, white substance that covers and protects the skin of a fetus while in the womb and is still present at birth in most cases.

Newborns

Infants from birth to about 2 months of age, characterized by rapid physical growth and development in the initial stages of life.