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Steve Forbes ran for U.S. president in 1996 and 2000 on a platform proposing a 17% flat tax, that is, an income tax that would simply be 17% of each tax payer's taxable income. Suppose that Joe was single in the year 2016 with a taxable income of $450,000. We learn that Joe actually made $900,000, but his taxable income was only $450,000 because of various deductions allowed by the system in 2016. Proponents of the flat tax say that many of these deductions should be eliminated, so the 17% flat tax should be applied to Joe's entire $900,000. What would Joe's tax be under the 17% flat tax

Respuesta :

anthougo

Answer:

Joe's tax under the 17% flat tax:

a) If the tax is based on Joe's entire $900,000 total earnings for 2016, his

Income tax = $153,000 ($900,000 * 17%)

b) If the tax is applied on the taxable income of $450,000 assuming some deductions are allowed, Joe's

Income tax = $76,500 ($450,000 * 17%)

Explanation:

a) Data and Calculations:

Joe's taxable income for 2016 = $450,000 after various deductions

Joe's taxable income for 2016 = $900,000 without deductions

Proposed rate of flat tax = 17%

b) A flat tax applies the same rate of tax on the income of all taxpayers in determining their tax liabilities.  It does not consider the different individual earnings.  It is the opposite of the current progressive tax rates system in which the percentages of tax increase as the taxpayer's income rises.

fichoh

The flat tax system describes the usage and application of a single tax rate on taxable income rather than a the varying tax rate which represents a progressive rate system. Hence, Joe's tax under the flat tax system would be $76500.

Given the Parameters :

  • Gross earning = $900,000
  • Taxable income = Gross earning - deductions = $450,000
  • Flat tax rate = 17%

Joe's tax amount is calculated thus :

  • Taxable income × Flat tax rate

Tax amount = $450,000 × 0.17

Tax amount = $76,500

Hence, Joe's tax amount would be $76,500

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