   Chapter 12, Problem 4PA

Chapter
Section
Textbook Problem

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 Table 2. How much tax of each type do you pay if you earn $30,000 a year? Taking all taxes into account, what are your average and marginal tax rates? What happens to your tax bill and to your average and marginal tax rates if your income rises to$60,000?

To determine
State income tax, federal payroll tax, federal income tax, average tax rate, marginal tax rate.

Explanation

State income tax amount can be calculated as follows:

State income tax=Income×Tax rateState=30,000×0.04=1,200

State income tax is $1,200. Federal payroll tax can be calculated as follows: Federal payroll tax=Income×Tax rateFederal payroll=30,000×0.153=4,590 Federal payroll tax is$4,590.

Federal income tax can be calculated as follows:

Federal income tax=(9,075×Tax rateIncome range 0 to 9,075)+((Income9,0785)×Tax rateIncome range 9,075 above)=(9,075×0.1)+((30,0009,075)×0.15)=907.5+3,138.75=4,046.25

The Federal income tax is $4,046.25. Average tax rate can be calculated as follows: Average tax rate=State income tax + Federal payroll tax + Federal income taxTotal income =1,200+4,590+4,046.2530,000=9,836.2530,000=0.3278 The average tax rate is 32.78%. Marginal tax rate is calculated as follows: Marginal tax rate = Total tax rate for the income above$9,075=0.15+0.153+0.04=0.343=34.3%

The marginal tax rate is 34.3%.

New state income tax amount can be calculated as follows:

State income tax=Income×Tax rateState=60,000×0.04=2,400

The State income tax is \$2,400

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