Question

In January 1914, Henry Ford startled the world by announcing that Ford Motor Company would pay $5 a day to its workers. At the time, $5 was about double what the average auto worker made.

A recent article stated that at General Motors, the total cost for wages (not including benefits) is about $40 an hour.

1) What was the income tax rate in 1914 for someone making $5 a day?

2) What was the income tax rate in 2017 for someone making $40 an hour?

3) What has the average annual inflation been since 1914?

4) What would $5 per hour be in 2017 dollars?

5) If you consider take home pay, who received the most take home pay in inflation adjusted 2017 dollars, the $5 per hour worker in 1914 or the $40 per hour worker today?

Note: This assignment is designed to help you develop a deeper understanding of the time value of money and the effects of taxation. The calculations are not that hard, but you'll need to give the question somes thought before starting. How do you calculate inflation? How do you calculate the value of a dollar today compared to the value of a dollar in years past? What are tax rates like today compared to what they were 100 years ago? What are the consequences of high tax rates?

Submit your answer in an Excel document properly labeled.

Answer 1

1. The income tax rate for a worker having wages $5 a day working for 365 days making total amount 1825$ yearly is 1% that makes total tax payable 18.25$.

2. The income tax rate in 2017 is 28% having income 40$ an hour for 8 hours a day for 365 days in a year making total income 116,800$.

3. Average inflation =

Cost of labour in 1914- $5 a day

cost of labour in 2017 $40 an hour working 8 hours= 320$ a day

step 1: divide $320 by $5 to get 64

step 2: Divide 1 by the number of years the inflation took place over. Divide 1 by 103 to get 0.009

step3: Raise the Step 1 result to the power of Step 2. raise 64 to the 0.009 power to get 1.03813927054

Step 4: Subtract 1 from the Step 3 result to find the average annual inflation rate expressed as a decimal. subtract 1 from 1.03813927054 to get 0.03813927054.

step 5: Multiply the average annual inflation rate by 100 to convert to a percentage. Multiply 0.03813927054 by 100 to find the average inflation rate to be about 3.81 percent per year.

4. Value of $5 per hour be in 2017 dollars:

$5 x(1+0.0381)¹⁰³= 235.29$ per hour

I= Inflation rate= 3.81%

N= No of years= 103