Question

1. Suppose we have the following schedule of tax rates

10% on the first $10,000

15% on the next $20,000

20% on the next $30,000

30% on anything above that

1. Calculate the total taxes owed by someone with $55,000 of income. What is his marginal tax rate? What is his average tax rate?
2. Suppose that someone’s income rises from $55,000 to $65,000 due to a promotion. How much does his after-tax income change?

Answer 1

Answer
a)
tax amount =sum of (income in the tax bracket * tax rate of the bracket)
tax amount =10000*0.1+20000*0.15+(55000-30000)*0.2
=9000
marginal tax rate is the tax on the extra dollar earned and if the income increeases from 55000 to 55001 then the income is in bracket of 20% so the marginal tax rate is 20%

average tax rate =(tax amount /income)*100
=(9000/55000)*100
=16.3636364
=16.36%
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b)
tax amount =10000*0.1+20000*0.15+30000*0.2+(65000-60000)*0.3
=11500
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after tax income=income -tax amount
after tax income when the income is $55000 is:
=55000-9000=46000

after tax income when income is $65000 is:
=65000-11500=53500
change in after tax income=53500-46000=7500
the after tax income increased by $7500