Suppose the tax rate is 10% on the first $20,000 of taxable income, then 25% on

Question

Suppose the tax rate is 10% on the first $20,000 of taxable income, then 25% on the next $30,000, then 50% on all taxable income above $50,000. The government also provides a $4,000 exemption per family member. (a) Ben’s family has three members and earns $50,000 per year. Calculate the family’s marginal and average tax rates. (b) Jerry’s family has five members and earns $85,000 per year. Calculate the family’s marginal and average tax rates. (c) Compare the average tax rates for Ben’s and Jerry’s families. Is this tax system progressive, regressive or proportional?

Explanation / Answer

Its a progessive tax system.

a. Bens family total income- $150000

- expemtion (3* 4000)             12000

Taxable income-                   $138000

Tax= 2000+7500+44000= $53500

Family avg tax rate= 53500/150000=35.66%

b. Jerry family total income- $ 85000* 5= $425000

- expemtion (5* 4000)             20000

Taxable income-                   $405000

Tax= 2000+7500+177500= $187000

Family avg tax rate= 187000/425000=44%

c. Ben family avg tax rate- 35.66%

Jerry family tax rate= 44%

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