Question

Suppose Carlos is a single parent with one child, and he is trying to determine the effect of transfer benefits and taxes on his implicit marginal tax rate (and thus his incentive to work). The following table shows the transfer benefits and income taxes at various income levels in the economy in which Carlos resides.

Compute the spendable income level Carlos would have at each level of earned income, and enter these values in the last column.

Earned Income from Work	Transfer Benefits	Income and Employment Taxes	Spendable Income
(Dollars)	(Dollars)	(Dollars)	(Dollars)
0	9,789	0	9,789
6,000	8,611	281
12,000	7,179	794
18,000	5,302	1,314
24,000	2,156	2,159
30,000	1,408	2,705

If Carlos's income from work increased from $18,000 to $24,000, his implicit marginal tax rate would be_______ .

^ Options: A. 59.4% B. 66.5% C.72.7% D. 133.5%

If Carlos's income from work increased from $24,000 to $30,000, his implicit marginal tax rate would be _______ .

^ Options: A.16.1% B.21.6% C.29.4% D.178.4%

Answer 1

Answer:

Spendable Income = Earned Income from Work + Transfer Benefits - Income and Employment Taxes

Earned Income from Work	Transfer Benefits	Income and Employment Taxes	Spendable Income
(Dollars)	(Dollars)	(Dollars)	(Dollars)
0	9,789	0	9,789
6,000	8,611	281	14,330
12,000	7,179	794	18,385
18,000	5,302	1,314	21,988
24,000	2,156	2,159	23,997
30,000	1,408	2,705	28,703

1]

Income increases from $18,000 to $24,000

When Dina's income increases by $6,000 (from $18,000 to $24,000) then her transfer benefits decreases by $3,146 (from $5,302 to $2,156) and her tax increases by $845 (from $1,314 to $2,159).

So,

Total loss of income = Decrease in transfer benefits + Increase in tax = $3,146 + $845 = $3,991

Calculate the implicit marginal tax rate -

Implicit marginal tax rate = (Total loss of income/Increase in income) * 100

Implicit marginal tax rate = ($3,991/$6,000) * 100 = 66.52%

Thus,

Her implicit marginal tax rate would be 66.5%

Correct option: B] 66.5%

2]

Income increases from $ 24,000 to $30,000

When Dina's income increases by $6,000 (from $18,000 to $24,000) then her transfer benefits decreases by $748 (from $2,156 to $1,408) and her tax increases by $546 (from $2,159 to $2,705).

So,

Total loss of income = Decrease in transfer benefits + Increase in tax = $748 + $546 = $1,294

Calculate the implicit marginal tax rate -

Implicit marginal tax rate = (Total loss of income/Increase in income) * 100

Implicit marginal tax rate = ($1,294/$6,000) * 100 = 21.57%

Thus,

Her implicit marginal tax rate would be 21.6%

Correct option: B] 21.6%