Question

Suppose the income tax rate schedule is 0 percent on the first $10,000; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on any income over $70,000. Family A earns $28,000 a year and Family B earns $65,000 a year. Both receive a ten percent raise. What is the marginal tax rate of each and what is the extra tax paid by each after the raise?

Answer 1

Step-by-step explanation:

Family A:

Original income = 28000, new income = 30800 [20800+20,800*10%]

marginal tax rate = 20%

Initially tax paid = 2800 (10% * 28000)

After the rise tax paid 6160 (20% * 30800)

Extra tax paid = 3360 [6160-2800]

Family B:

Original income = 65000, new income = 71500 [65,000+65,000*10%]

marginal tax rate = 24%

Initially tax paid = 19500 (30% * 65000)

After the rise tax paid 28600 (40% * 71500)

Extra tax paid = 9100 [28600-19500]