1) If Bill’s marginal tax rate is 0% and charitable contributions are deductible
ID: 1164813 • Letter: 1
Question
1) If Bill’s marginal tax rate is 0% and charitable contributions are deductible from income for tax purposes, how much does it cost him (net of tax) to make a $1,000 charitable contribution? If Bill’s marginal tax rate is 30% and all charitable contributions are deductible from income for tax purposes, how much does it cost him (net of tax) to make a $1,000 charitable contribution? If Bill’s marginal tax rate is 30% and you receive a tax credit for every dollar that you contribute to charity, how much does it cost him (net of tax) to make a $1,000 charitable contribution?
2) How are deductions regressive? (Hint: think about taxpayers with different MTRs.)
Explanation / Answer
1) If Bill's marginal tax rate is 0% and charitable contributions are deductible from income for tax purposes, it costs Bill $1000. ($1000 - 0% of 1000)
If Bill's marginal tax rate is 30% and all charitale contributions are deductible from income for tax purposes, it costs Bill $700. (1000 - 30% of 1000)
If Bill's marginal tax rate is 30% and he receives a tax credit for every dollar he contributes to charity, it costs Bill ($1000 - 30% of 1000) = $700.
2) Deductions are regressive as it brings down the amount of tax payable. A person with falling under a high tax slab could pay less tax by contributing a certain amount to charity which is deductible from taxation. This way the taxation which is based on the ability to pay is not fully applicable.
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