A city government imposes a proportional income tax on all people who earn income within its city limits. In 2004, the city's income tax rate was 0.050.05 (55 percent), and it collected $20.0020.00 million in income taxes. In 2005, it raised the income tax rate to 0.060.06 (66 percent), and its income tax collections declined to $19.2019.20 million. What happened to the city's income tax base between 2004 and 2005?

Question

Zane Wu

Business

4 January, 04:02

A city government imposes a proportional income tax on all people who earn income within its city limits. In 2004, the city's income tax rate was 0.050.05 (55 percent), and it collected $20.0020.00 million in income taxes. In 2005, it raised the income tax rate to 0.060.06 (66 percent), and its income tax collections declined to $19.2019.20 million. What happened to the city's income tax base between 2004 and 2005?

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Rory Yu · Answer 1

The city's income base fell by $80 million

Explanation:

If during 2004 the city was able to raise $20 million with a 5% income tax, then the city's income base was:

($20 million / 5) x 100 = $400 million

If during 2005 the city was only able to raise $19.20 million with a 6% income tax, then the city's income base lowered to:

($19.20 million / 6%) x 100 = $320 million

This means that the city's income base was reduced by $80 million ( = $400 million - $320 million)