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Between 1977 and 1989, the percentage of income paid to [#permalink]
26 Sep 2011, 19:09

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Question Stats:

48% (02:34) correct
52% (01:49) wrong based on 122 sessions

Between 1977 and 1989, the percentage of income paid to Federal taxes by the richest one percent of Americans decreased, from 40 percent to 25 percent. By the end of that same period, however, the richest one percent of Americans were paying a larger proportion of all Federal tax revenues, from 12.7 percent in 1977 to 16.2 percent in 1989.

Which of the following, if true, contributes most to an explanation of the discrepancy described above? Between 1977 and 1989, the Internal Revenue Service increased the percentage of its staff members responsible for audits and tax collection. Between 1977 and 1989, the before-tax income of the richest one percent of Americans increased by over 75 percent when adjusted for inflation. Between 1977 and 1989, many of the richest one percent of Americans shifted their investments from untaxable to taxable assets. Between 1977 and 1989, the top tax rate was reduced from 70 percent to 31 percent and several tax loopholes were eliminated. Between 1977 and 1989, the amount of Federal taxes paid by the richest one percent of Americans increased by $45 billion, while the amount paid by all Americans rose by $50 billion.

Re: Resolve the paradox [#permalink]
26 Sep 2011, 20:33

maheshsrini wrote:

Between 1977 and 1989, the percentage of income paid to Federal taxes by the richest one percent of Americans decreased, from 40 percent to 25 percent. By the end of that same period, however, the richest one percent of Americans were paying a larger proportion of all Federal tax revenues, from 12.7 percent in 1977 to 16.2 percent in 1989.

Which of the following, if true, contributes most to an explanation of the discrepancy described above? Between 1977 and 1989, the Internal Revenue Service increased the percentage of its staff members responsible for audits and tax collection. Between 1977 and 1989, the before-tax income of the richest one percent of Americans increased by over 75 percent when adjusted for inflation. Between 1977 and 1989, many of the richest one percent of Americans shifted their investments from untaxable to taxable assets. Between 1977 and 1989, the top tax rate was reduced from 70 percent to 31 percent and several tax loopholes were eliminated. Between 1977 and 1989, the amount of Federal taxes paid by the richest one percent of Americans increased by $45 billion, while the amount paid by all Americans rose by $50 billion.

A - Irrelevant B - Correct - Pre-tax income increased means revenue increased. Since the pre-tax income was adjusted against inflation, the % of taxes decreased. C - Explains why revenues increased, but does not explain why taxes decreased. D - Explains why taxes decreased, but does not explain why revenues increased. E - Irrelevant, since we cannot calculate %

Re: Between 1977 and 1989, the percentage of income paid to [#permalink]
25 Oct 2013, 08:00

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Re: Between 1977 and 1989, the percentage of income paid to [#permalink]
25 Oct 2013, 08:26

IMO this is how you reason how B is the answer. First you are dealing with a couple different pots.

You have: Pot 1 - Total Taxpayer Income Pot 2 - Total Taxpayer Income - 1% Highest Income Earner Pot 3 - Total Taxpayer Income Taxes Pot 4 - Total Taxpayer Income Taxes - - 1% Highest Income Earner @ 40% rate Pot 5 - Total Taxpayer Income Taxes - - 1% Highest Income Earner @ 25% rate

Pick Some Numbers to represent each Pot:

Pot 1 = $1000 , and Pot 2 = $200 - Therefore the 1% income earners taxes at the 40% rate would be $80 and @ 25% rate would be $50.

Say Pot 3 is $200 (total income taxes paid). Therefore, the % of the total taxes paid by the 1% Inc. Earners is 80/200 or 40%. If all the Pots remained constant when the tax rate is lowered to 25 % then % of taxes paid by the 1% Inc. Earners would decrease to 50/200 or 1/4 or 25%. But what is implied by Answer B is that despite the lowering of the tax rate, the amount of income earned by the 1% also increased by 75%. So instead of income of $200 for the top 1% they now have income of $350. So recalculate the rates and see how that effects the percentage of the income taxes paid. They now pay 25% rate. So they pay $87.5 in taxes. The $87.5 represents 87.5/200 or 43.25% of the total income taxes paid. Before the rate change the 1% income earners paid 40% of the total taxes and now they are paying 43.25%. The numbers are not exact to the problem but the concept in play is the same. Hope it helps.