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Scenario 2: Calculate the taxes for someone who earned $20,000 in standard wage income, $40,000 in qualified dividends, has no dependents, and takes the standard deduction. Scenario 1: Calculate the taxes for someone who earned $60,000 in standard wage income (W-2 income), has no dependents, and takes the standard deduction. Visit and download the most recent version of forms 1040, and schedules A, B, C, and D. Then compute the effective tax rate for each plan relative to discretionary income rather than income.Ĩ) Which plan seems the most fair to you? Which plan seems the least fair to you? Why? For each income group, estimate their essential expenses, and calculate their discretionary income. The cost of basic expenses does increase with income, since housing and car costs are higher, however usually not proportionally. There is no one right answer here – just make sure you bring in enough money!ħ) Discretionary income is the income people have left over after paying for necessities like rent, food, transportation, etc. For simplicity, we’re going to assume that a household is taxed at the same rate on all their income.Ħ) Set progressive tax rates for each income group to bring in enough money. The third proposal we’ll consider is a progressive tax, where lower income groups are taxed at a lower percent rate, and higher income groups are taxed at a higher percent rate. Everyone in group B will pay taxes only on $9,000.ģ) Determine the total taxable income for the whole populationĤ) Determine what flat tax rate would be necessary to collect enough money in this modified systemĥ) Complete this table for both the plans So, everyone in group A will pay no taxes. The second proposal we’ll consider is a modified flat-tax plan, where everyone only pays taxes on any income over $20,000. The first proposal we’ll consider is a flat tax – one where every income group is taxed at the same percentage tax rate.ġ) Determine the total income for the population (all 100 people together)Ģ) Determine what flat tax rate would be necessary to collect enough money. We are going to determine new income tax rates. This scenario is roughly proportional to the actual United States population and tax needs. Group F: 5 households that earn $295,000 each Group E: 15 households that earn $129,000 each Group D: 20 households that earn $79,000 each Group C: 20 households that earn $50,000 each Group B: 20 households that earn $29,000 each

Group A: 20 households that earn $12,000 each The federal government needs to collect $800,000 in income taxes to be able to function. Imagine the country is made up of 100 households. Project 1: Flat tax, Modified Flat Tax, and Progressive Tax.