A state gives a credit against its income tax equal to 50% of any donation to a child welfare agency (subject to a limit of $50 credit per person). Mr. Jones (in the 15% federal tax bracket) and Mr. Smith (in the 35% federal tax bracket) each give $100 to eligible agencies.
1) How much wil state tax liabilities change for each as a result of their donation?
2) Sate income tax payments and contributions to charitible agencies are both deductible from the base used to compute federal liability. how much will federal tax liability change for Mr. Jones and Mr. Smith as a result of their donation?
3) Considering both changes in federal and state liability, what is the net after tax cost of Mr. Jones and Mr. Smith's donations? (hint: substract the changes in state and federal liability from $100)
4) Suspose the state program changed from a credit to a deduction. If the state tax rate werea a flat 3%, how much would state liability change for Mr. Jones and Mr. SMith.
5) From the previous computations, which approach (credit or deduction) do you suppose charitible organizations in the state would favor and why?