Question

You are offered a choice between paying a flat tax (one rate on all income) of 20% on $44,000 of income and paying a graduated tax of the following schedule on the same income. Schedule: 10% on the first $25,000; 30% on your income over $25,000. Which is better for you?

Answer 1

Flat tax would mean you pay: $8,800 (44,000*0.20)

Graduated Tax would mean you pay: $8,200 (25,000*0.10) + (19,000*0.30)
2,500 + 5,700

Paying a graduated tax is better for you.

Answer 2

Graduated tax schedule.

Explanation:

We have been given that you are offered a choice between paying a flat tax (one rate on all income) of 20% on $44,000 of income.

Let us find the amount of interest paid by finding 20% of $44,000.

`\text{Amount of interest at flat tax rate}=(20)/(100)* \$44,000`

`\text{Amount of interest at flat tax rate}=0.20* \$44,000`

`\text{Amount of interest at flat tax rate}=\$8,800`

Therefore, the amount of interest paid at flat tax rate is $8,800.

Now we will find the amount paid under graduated tax schedule.

Firstly, we will find the 10% of $25,000 and then we will figure out 30% of $19,000 ($44,000-25,000).

`\text{Amount of interest under graduated tax rate on 1st \$25,000}=(10)/(100)* \$25,000`

`\text{Amount of interest under graduate rate on 1st \$25,000}=0.10* \$25,000`

`\text{Amount of interest under graduated tax rate on 1st \$25,000}=\$2500`

`\text{Amount of interest under graduated tax rate on income over \$25,000}=(30)/(100)* \$19,000`

`\text{Amount of interest under graduated tax rate on income over \$25,000}=0.30* \$19,000`

`\text{Amount of interest under graduated tax rate on income over \$25,000}=\$5,700`

The total amount of tax paid under graduated tax:
`\$2500+\$5700=\$8200`

Since amount of interest paid under graduated tax is $8,200, which is less than $8,800, therefore, graduated tax schedule is better for you.