Question

2. Problems and Applications Q2

Suppose you are a typical person in the U.S. economy. You pay 4 percent of your income in a state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employee shares combined). You also pay federal income taxes as in the following table:

On Taxable Income...	The Tax Rate Is...
From $0 to $9,075	10.0%
From $9,076 to $36,900	15.0%
From $36,901 to $89,350	25.0%
From $89,351 to $186,350	28.0%
From $186,351 to $405,100	33.0%
From $405,101 to $406,750	35.0%
From $406,751 and above	39.6%

Complete the following table with how much tax of each type you pay if you earn $10,000 a year. (Note: Ignore any credits or deductions of one tax type on other tax liabilities.)

Tax Type	Amount
	(Dollars)
State Income Tax
Federal Payroll Tax
Federal Income Tax

Taking all taxes into account, your average tax rate is ---------------------- and your marginal tax rate is------------------------------- .

Complete the following table with how much tax of each type you pay if you earn $40,000 a year.

Tax Type	Amount
	(Dollars)
State Income Tax
Federal Payroll Tax
Federal Income Tax

Taking all taxes into account, your average tax rate is-------------------------- , and your marginal tax rate is----------------------- in this case.

Answer 1

When Income is $10,000:-

State Income Tax = 0.04 * $10,000 = 400

Federal Payroll Tax = 0.153 * $10,000 = 1530

Federal Income Tax = (0 - 9075 * 10%) + (9075 - 10,000 * 15%)

                                    = (9075 * 0.10) + (925 * 0.15)

                                    = 907.5 + 138.75

                                    = 1046.25

Average Tax rate = Total Tax / Total Income * 100

                               = 400 + 1530 + 1046.25 / 10,000 * 100

                               = 2976.25 / 10,000 * 100

                               = 29.7625%

Marginal Tax Rate = 0.04 + 0.153 + 0.15 = 34.3%

When Income is $40,000:-

State Income Tax = 0.04 * $40,000 = 1600

Federal Payroll Tax = 0.153 * $40,000 = 6120

Federal Income Tax = (0 - 9075 * 10%) + (9075 - 39,600 * 15%) + (39,600 – 40,000 * 25)

                                    = (9075 * 0.10) + (30,525 * 0.15) + (400 * 0.25)

                                    = 907.5 + 4578.75 + 100

                                    = 5586.25

Average Tax rate = Total Tax / Total Income * 100

                               = 1600 + 6120 + 5586.25 / 40,000 * 100

                               = 13,306.25 / 40,000 * 100

                               = 33.2656%

Marginal Tax Rate = 0.04 + 0.153 + 0.25 = 44.3%