Congress would like to increase tax revenues by 13.5 percent. Assume that the average taxpayer in the United States earns $64,000 and pays an average tax rate of 20 percent.

Required:
If the income effect is in effect for all taxpayers, what average tax rate will result in a 13.5 percent increase in tax revenues?



To determine the new average tax rate that will result in a 13.5% increase in tax revenues, we need to calculate the initial tax revenue and then find the new tax rate that will achieve the increased revenue.

Here's a step-by-step breakdown of the solution:

1. **Calculate the initial tax revenue:**

   The initial tax revenue is determined by multiplying the average income by the average tax rate.

   \[
   \text{Initial Tax Revenue} = \text{Average Income} \times \text{Initial Tax Rate} = 64,000 \times 0.20 = 12,800
   \]

2. **Determine the target tax revenue after a 13.5% increase:**

   A 13.5% increase in tax revenue can be calculated as:

   \[
   \text{Target Tax Revenue} = \text{Initial Tax Revenue} \times (1 + 0.135) = 12,800 \times 1.135 = 14,528
   \]

3. **Find the new tax rate that will achieve the target revenue:**

   To find the new average tax rate, we set up the equation using the target tax revenue and solve for the new tax rate:

   \[
   \text{New Tax Rate} = \frac{\text{Target Tax Revenue}}{\text{Average Income}} = \frac{14,528}{64,000}
   \]

Let's calculate this new tax rate: 

\[
\text{New Tax Rate} = \frac{14,528}{64,000} \approx 0.227
\]

So, the new average tax rate is approximately **22.7%**.

This new tax rate will result in a 13.5% increase in tax revenues, assuming the income effect applies uniformly across all taxpayers.

---

Would you like further details, or do you have any other questions?

Here are some related questions you might find interesting:

1. How would the result change if the average income were different?
2. What is the income effect, and how does it impact tax revenue calculations?
3. How would changes in taxpayer behavior affect this tax rate increase?
4. What would be the impact of different tax rates on various income groups?
5. How does the marginal tax rate differ from the average tax rate, and why is this important in tax policy?

**Tip:** Always consider how changes in tax policy might affect taxpayer behavior, as this can impact the expected revenue differently than projected purely by arithmetic adjustments.

Congress would like to increase tax revenues by 13.5 percent. Assume that the average taxpayer in the United States earns $64,000 and pays an average tax rate of 20 percent. If the income effect is in effect for all taxpayers, what average tax rate will result in a 13.5 percent increase in tax revenues?

Discover how to calculate the new average tax rate needed for a 13.5% increase in tax revenue, given an average income of $64,000 and an initial tax rate of 20%. Follow a step-by-step breakdown of revenue and tax rate adjustments. Ideal for high school students in Grades 10-12.

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