The Federal Budget: End of Chapter Problem
In 1989, Senator Bob Packwood asked Congress's Joint Committee on Taxation how much extra revenue the government would
raise if it just started taxing 100% of all income over $200,000 per year. The Joint Committee crunched some numbers and
reported an answer: $204 billion per year.
a. What is wrong with this answer?
The Joint Committee on Taxation did not have the tools needed to make such an estimate accurately.
No one would have an incentive to work once they had earned $200,000, so much of the taxable income
would disappear.
In 1989, very few people made over $200,000 a year, so the estimate of the tax revenue is far too high.
Increasing government spending by $204 billion each year would have generated economic growth, and subsequently
even higher amounts of tax revenues.
b. Under Packwood's proposal, what would the marginal tax rate be at $250,000 per year? At $500,000 per year?
Marginal rate at $250,000:
%
Marginal rate at $500,000:
%
