Mr. and Mrs. J 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.
a. Based on a static forecast, how much additional revenue will the federal government collect from Mr. and Mrs. J next year?
b. How much additional revenue will the government collect if Mr. and Mrs. J respond to the rate increase by working harder and earning $140,000 next year?
c. How much additional revenue will the government collect if Mr. and Mrs. J respond to the rate increase by working less and earning only $110,000 next year?