The federal tax code allows businesses but not individuals to deduct the cost of health insurance premiums from their taxable income. Consider a company named HeadBook that could either spend $15,000 on an insurance policy for an employee named Vanessa or increase her annual salary by $15,000 instead. Instructions: Enter your answers as a whole number.

a. As far as the tax code is concerned, HeadBook will increase its expenses by $15,000 in either case. If HeadBook pays for the policy, it incurs a $15,000 health care expense. If it raises Vanessas salary by $15,000, it incurs $15,000 of salary expense. If HeadBook is profitable and pays corporate profit taxes at a marginal 30 percent rate, by how much will HeadBooks tax liability be reduced in either case?

$

b. Suppose that Vanessa pays personal income tax at a marginal 15 percent rate. If HeadBook increases her salary by $15,000, how much of that increase will she have after paying taxes on that raise?

$

If Vanessa can devote what remains after paying taxes on the $15,000 only to purchasing health insurance, how much will she be able to spend on health insurance for herself?

$

c. If HeadBook spends the $15,000 on a health insurance policy for Vanessa instead of giving it to her as a raise, how many more dollars will HeadBook be able to spend on Vanessas health insurance than if she had to purchase it herself after being given a $15,000 raise and paying taxes on that raise?

$

d. Would Vanessa prefer to have the raise or to have HeadBook purchase insurance for her?

Vanessa would prefer to have HeadBook purchase insurance for her.

Would HeadBook have any profit motive for denying Vanessa her preference?

No

e. Suppose the government changes the tax law so that individuals can now deduct the cost of health insurance from their personal incomes. If Vanessa gets the $15,000 raise and then spends all of it on health insurance, will her tax liability change?

No

How much will she be able to spend on health insurance?

$

15000 Will she now have a preference for HeadBook to buy insurance on her behalf?

No