Problem #1
1. To calculate Mary’s comprehensive income, multiply the market value of the condominium ($100,000) by 5%
which is the increase in value. Make sure to change 5% to decimal first (.05) before multiplying it by 100,000.
100,000(.05) = $5,000 this is the amount of increase to the value of the condo.
2. Then, multiply the market value of the condominium ($100,000) by 3% which is the inflation rate. Make sure to
change 3% to decimal first (.03) before multiplying it by 100,000.
100,000(.03) = $3,000 this is the amount of inflation
3. Subtract the amount of inflation from the amount of increase and then add that amount to Mary’s earnings to get
her comprehensive income.
5,000 – 3,000 + 50,000 = $52,000 this is Mary’s comprehensive income.
4. Now, if she were subjected to comprehensive income tax at 20% flat rate, her tax liability can be calculated by
multiplying her comprehensive income ($52,000) by 20%. Make sure to change 20% to decimal first (.20) before
multiplying it by 52,000.
52,000(.20) = $10,400 this is Mary’s tax liability for the year.
In summary, Mary has a real unrealized capital gain of $2,000. Her comprehensive income is therefore $52,000. Under a
20-percent, flat-rate tax, her tax liability would be $10,400 for the year.
Problem #2
1. To calculate the change in well-being that would result from a $10 billion increase in taxes (15%) on labor
income, we would multiply $10 billion by 15%. Make sure to change 15% to decimal first (.15) before
multiplying it by 10 billion.
10,000,000,000(.15) = $1,500,000,000 or $1.5 billion this is the added excess burden of labor income
2. To calculate the well-being that would result from a $10 billion reduction in taxes (45%) on capital income, we
would multiply $10 billion by 45%. Make sure to change 45% to decimal first (.45) before multiplying it by 10
billion.
10,000,000,000(.45) = $4,500,000,000 or $4.5 billion this is the reduction of excess burden of capital
income
3. To calculate the net increase in well-being, subtract the added excess burden of labor income (1.5 billion) from
the reduction of excess burden of capital income (4.5 billion).
4.5 billion – 1.5 billion = $3,000,000,000 or $3 billion this is the net increase in well-being.
In summary, a $10 billion reduction in taxes on capital income will reduce the excess burden by $4.5 billion. A $10 billion
increase in taxes in labor income will result in a new added excess burden of $1.5 billion. There will be a net increase in
well-being of $3 billion because of the change.
Problem #3
