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?
A. Family A: 20 percent marginal tax rate and $560 in extra taxes. Family B: 40 percent marginal tax rate and $2600 in extra taxes.
B. Family A: 20 percent marginal tax rate and $360 in extra taxes; Family B: 40 percent marginal tax rate and $2100 in extra taxes.
C. Family A: 15 percent marginal tax rate and $420 in extra taxes; Family B: 35 percent marginal tax rate and $2275 in extra taxes.
D. Family A: 10 percent marginal tax rate and $280 in extra taxes; Family B: 30 percent marginal tax rate and $1950 in extra taxes.
I think the correct answer is B.
For A, income goes from 28000 to 30800, a change of 2800. Since the new income is between 30000 and 50000, the mtr is 20%. Of the change in income of 2800, 2000 was taxed at the 10% rate and the remaining 800 was taxed at the 20% rate. So, .1*2000+.2*800 = 360.
Repeat for Family B.
Is the answer D?
(I picked D I think the marginal tax rates are correct, but I'm not sure how to calculate the extra tax paid)
To determine the marginal tax rate for each family and the extra tax paid after the raise, we need to follow the income tax rate schedule.
For Family A:
1. Calculate the initial income tax:
- Income: $28,000
- $10,000 is taxed at 0%: $0
- The next $20,000 is taxed at 10%: $20,000 * 0.10 = $2,000
- Remaining income: $28,000 - ($10,000 + $20,000) = $8,000
- No further tax is applied since the remaining income is below the next tax bracket.
2. Calculate the income after the raise:
- Raise: 10% of $28,000 = $2,800
- New income: $28,000 + $2,800 = $30,800
3. Calculate the new income tax after the raise:
- Income: $30,800
- $10,000 is taxed at 0%: $0
- The next $20,000 is taxed at 10%: $20,000 * 0.10 = $2,000
- Remaining income: $30,800 - ($10,000 + $20,000) = $800
- No further tax is applied since the remaining income is below the next tax bracket.
4. Calculate the extra tax paid after the raise:
- Extra tax paid = New income tax - Initial income tax
- Extra tax paid = $2,000 - $2,000 = $0
Therefore, for Family A: The marginal tax rate is 20 percent (applied to the next tax bracket) and there is $0 in extra taxes paid after the raise.
For Family B:
1. Calculate the initial income tax:
- Income: $65,000
- $10,000 is taxed at 0%: $0
- The next $20,000 is taxed at 10%: $20,000 * 0.10 = $2,000
- The next $20,000 is taxed at 20%: $20,000 * 0.20 = $4,000
- The next $20,000 is taxed at 30%: $20,000 * 0.30 = $6,000
- Remaining income: $65,000 - ($10,000 + $20,000 + $20,000 + $20,000) = $15,000
- No further tax is applied since the remaining income is below the next tax bracket.
2. Calculate the income after the raise:
- Raise: 10% of $65,000 = $6,500
- New income: $65,000 + $6,500 = $71,500
3. Calculate the new income tax after the raise:
- Income: $71,500
- $10,000 is taxed at 0%: $0
- The next $20,000 is taxed at 10%: $20,000 * 0.10 = $2,000
- The next $20,000 is taxed at 20%: $20,000 * 0.20 = $4,000
- The next $20,000 is taxed at 30%: $20,000 * 0.30 = $6,000
- Remaining income: $71,500 - ($10,000 + $20,000 + $20,000 + $20,000) = $1,500
- The remaining $1,500 is taxed at 40%: $1,500 * 0.40 = $600
4. Calculate the extra tax paid after the raise:
- Extra tax paid = New income tax - Initial income tax
- Extra tax paid = ($2,000 + $4,000 + $6,000 + $600) - ($2,000 + $4,000 + $6,000) = $600
Therefore, for Family B: The marginal tax rate is 40 percent (applied to the income over $70,000) and there is $600 in extra taxes paid after the raise.
From the given options, the correct answer is:
C. Family A: 15 percent marginal tax rate and $420 in extra taxes; Family B: 35 percent marginal tax rate and $2275 in extra taxes.
To find the marginal tax rate and extra tax paid after a raise for each family, we need to follow these steps:
1. Calculate the new income for each family after the ten percent raise:
- Family A's new income: $28,000 + ($28,000 * 0.10) = $30,800
- Family B's new income: $65,000 + ($65,000 * 0.10) = $71,500
2. Determine the income tax rate for each family based on their new income:
- For Family A, the income falls into the $10,000 - $30,000 bracket, which has a 10 percent tax rate. Therefore, the marginal tax rate for Family A remains 10 percent.
- For Family B, the income falls into the $30,000 - $50,000 bracket, which has a 20 percent tax rate. Therefore, the marginal tax rate for Family B remains 20 percent.
3. Calculate the extra tax paid for each family after the raise:
- For Family A, the increase in income is $30,800 - $28,000 = $2,800. The extra tax paid is $2,800 * 0.10 = $280.
- For Family B, the increase in income is $71,500 - $65,000 = $6,500. The extra tax paid is $6,500 * 0.20 = $1,300.
Based on the calculations above, the correct answer is:
D. Family A: 10 percent marginal tax rate and $280 in extra taxes; Family B: 20 percent marginal tax rate and $1,300 in extra taxes.