Suppose Alyssa is a single parent with one child, and she is trying to determine

Question

Suppose Alyssa is a single parent with one child, and she is trying to determine the effect of transfer benefits and taxes on her implicit marginal tax rate (and thus her incentive to work). The following table shows the transfer benefits and income taxes at various income levels in the economy in which Alyssa resides Compute the spendable income level Alyssa would have at each level of earned income, and enter these values in the last column Transfer Benefits (Dollars) 9,691 8,521 7,079 5,250 2,128 1,348 Income and Employment Taxes (Dollars) Spendable Income (Dollars) 9,691 Earned Income from Work (Dollars) 5,000 10,000 15,000 20,000 25,000 237 842 1,545 2,147 2,663 8,284 6,237 3,705 -19 -1,315 If Alyssa's income from work increased from $15,000 to $20,000, her implicit marginal tax rate would be-74. ? If Alyssa's income from work increased from $20,000 to $25,000, her implicit marginal tax rate would be

Explanation / Answer

When income was 15000 total tx paid are (237+842+1545)=2524

When income was 2000 total tx paid are 2524+2147=4671

Tax was 2524/15000=16.82%

tax was 4671/20000=23.35%

marginal tax rate=(23.35%-16.82%)=74.5%

When income was 20000 total tx paid are 4671

When income was 2000 total tx paid are 4671+2663=7334

tax was 4671/20000=23.35%

tax was 7334/25000=29.34%

marginal tax rate=(29.34%-23.35%)=60%

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