The IRS Uses Geometric Series?

I recently read the delightful article “The IRS Uses Geometric Series?” by Michelle Ghrist in the August/September 2019 issue of MAA FOCUS. The article concerns a church raffle for a $4000 ATV in which the church would pay for the tax bill of the winner. This turned out to be an unexpected real-world application of an infinite geometric series. A few key quotes: According to the IRS rules at the time,

…winnings below a certain level [were] subject to a 25% regular gambling withholding tax…

My initial thought was that the church would need to pay 0.25 \times \$4000 = \$1000 to the IRS. However, I then wondered if this extra \$1000 payment would then be considered part of the prize and therefore also subject to 25% withholding, requiring the church to give 0.25 \times \$1000 = \$250 more to the IRS. But then this \$250 would also be part of the prize and subject to withholding, with this process continuing forever.

I got quite excited about the possibility of an infinite geometric series being necessary to implement IRS tax code. By my calculations… [gave] an effective tax rate of 33-1/3%.

I then read more of the instructions, which clarified if the payer pays the withholding tax rate for the payee, “the withholding is 33.33% of the FMV [Fair Market Value] of the noncash payment minus the amount of the wager.” It was satisfying to discover the behind-the-scenes math leading to that number…

In any event, I am glad to know that the IRS can properly apply geometric series.”

Here’s a link to the whole article:{%22issue_id%22:606088,%22page%22:%2214%22}

Note: The authors notes that, in January 2018, the IRS dropped the two above rates to 24% and 31.58%.

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