Congress Would Like to Increase Tax Revenues by 20 Percent

question 54

Essay

Congress would like to increase tax revenues by 20 percent. Assume that the average taxpayer in the United States earns $80,000 and pays an average tax rate of 17.5%. If the income effect is larger than the substitution effect, what average tax rate will result in a 20 percent increase in tax revenues? This is an example of what type of forecasting?

---

Definitions:

Lemon Crop

The production output of lemons within a particular period.

Consumer Surplus

The differential between the financial amount consumers are willing to allocate for a product or service and the actual payment made.

Price Floor

A government-imposed minimum price charged on goods and services, set above the equilibrium price to prevent market prices from falling too low.

Consumer Surplus

The discrepancy between consumer willingness to pay a total amount for a product or service and the amount they really do pay.