Exam 1: An Introduction to Tax

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Horizontal equity means that two taxpayers in similar situations pay the same tax.Thus,to make the tax structure horizontally equitable,Carrie should pay $1,500 in tax.
Fantasia's average tax rate is 7.5%.
To be vertically equitable with respect to tax rates,Simon should pay a tax rate higher than 7.5%.A 7.5% tax rate on Simon's $30,000 taxable income would result in $2,250 of tax (i.e.,7.5% × $30,000 = $2,250).Thus,Simon must pay more than $2,250 tax for the tax structure to be vertically equitable (i.e.,to generate a tax rate more than 7.5%).This would result in a progressive tax rate structure.

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We cannot evaluate whether the tax rate structure is horizontally equitable because we are unable to determine if taxpayers in similar situations pay the same tax (i.e.,the problem does not give data for two taxpayers with the same income).The tax rate structure would be considered vertically equitable because taxpayers with higher income pay more tax and at a higher rate.Specifically,Moe's,Larry's,and Curly's average tax rates are 7.5%,21.25%,and 25.5%,respectively.