The essay of ECo

Econ 4310

State and Local Finance

Homework #6 (20 points)

Due: April 15 at 11pm

Submitted to Carmen

Notes:

1. Any submitted documents that cannot be opened will not be graded and receive a zero.

2. Do your own work. You may work together, but you answers should not be the same. Answers considered to be the same will be graded as a zero.

3. Start each new question on a separate page.

1. Suppose that a tax payer is in the 15% tax-rate bracket for the federal individual income tax and faces a 5% state income tax.

a. If the taxpayer cannot deduct either tax against the other, what is the taxpayer’s combined marginal tax rate? What is the marginal tax rate if the taxpayer itemizes federal deductions and deducts the state tax? What if there was reciprocal deductibility?

b. Now calculate all three combined marginal tax rates assuming that the state income tax rate is 10%. How do they change?

2. Suppose a tax payer faces a federal marginal income tax rate of 25% and pays local property taxes of $2,000 per year.

a. Assume the taxpayer itemizes federal deductions and, thus, deducts the local property tax. No state income tax deduction for local taxes exists. What is the net after-tax cost of property taxes to this taxpayer?

b. Suppose the state introduces an income tax credit of 25% of property taxes up to a maximum of $600. What is the taxpayer’s net property tax cos now? (Remember that the state income tax is also deducted against the federal tax.) How much does the net cost fall because of the credit? How much more would this taxpayer pay (net) if property taxes were increased to $2,100?