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?

• A. Family A: 10 percent marginal tax rate and $280 in extra taxes; Family B—30 percent marginal tax rate and $1950 in extra taxes.
• B. Family A: 10 percent marginal tax rate and $420 in extra taxes; Family B—30 percent marginal tax rate and $2275 in extra taxes.
• C. Family A: 20 percent marginal tax rate and $360 in extra taxes; Family B—40 percent marginal tax rate and $2100 in extra taxes.
• D. Family A: 20 percent marginal tax rate and $560 in extra taxes. Family B—40 percent marginal tax rate and $2600 in extra taxes.
• E. None of the above.

Answer 1

option d) will be the correct answer because family A's extra income comes under the 20% slab after they get a 10%raise and their total income becomes $30800 and their extra tax will be $560 calculated on the extra 2800 (the raise amount ). Similarly, for family B, their income increases by 10% making it $71500 and the extra tax they have to pay will be $2600