Question

By how much did the disposable income of rich people decrease as a result of the 2012 hike in the top marginal tax rate from 35 to 39.6 percent? Assume they have $2 trillion of gross income in the highest bracket.

$_____ billion

Answer 1

Calculate disposable income, when marginal tax rate is 35 percent -

Gross income \(=\$ 2\) trillion

Tax rate \(=35 \%\) or \(0.35\)

Amount of \(\operatorname{tax}=\$ 2\) trillion \(\times 0.35\) \(=\$ 700\) billion Disposable income \(=\) Gross income - Amount of tax \(=\$ 2\) trillion \(-\$ 700\) billion \(=\$ 1.3\) trillion or 1,300 billion

The disposable income, when marginal tax rate is 35 percent is \(\$ 1,300\) billion.

Calculate disposable income, when marginal tax rate is \(39.6\) percent \(-\)

Gross income \(=\$ 2\) trillion

Tax rate \(=39.6 \%\) or \(0.396\)

Amount of \(\operatorname{tax}=\$ 2\) trillion \(\times 0.396\) \(=\$ 792\) billion

Disposable income \(=\) Gross income - Amount of tax \(=\$ 2\) trillion - \(\$ 792\) billion \(=\$ 1.208\) trillion or 1,208 billion

The disposable income, when marginal tax rate is \(39.6\) percent is \(\$ 1,208\) billion.

Calculate decrease in disposable income -

Decrease \(=\) Disposable income at \(35 \%\) tax rate \(-\) Disposable income at \(39.6 \%\) tax rate \(=\$ 1,300\) billion \(-1,208\) billion \(=\$ 92\) billion

Thus, disposable income of rich people has decreased by \(\$ 92\) billion.