Joe is a single person. He earned dollar 75k last year. Among his important expe

Question

Joe is a single person. He earned dollar 75k last year. Among his important expenditures last year: dollar 10k of interest on his mortgage, a dollar 2.5k payment on the principal of his home loan, dollar 700 in charitable contributions, dollar 450 on health care, and dollar 392 for food while at work. The current standard deduction for a single person is dollar 5,800 and the personal exemption is dollar B700 He can deduct the interest on his home loan and all charitable contributions Please calculate how much Joe owes in taxes using the tax table. What is Joe's marginal tax rate? What is Joe's effective tax rate? Is this tax schedule progressive? Using Joe as an example, explain why the US government may not be horizontally equitable.

Explanation / Answer

a.

Here given,

Income = $75

Total deductible amount = $12.7k

Taxable income = income – deductible amount

      = $75 - $12.7k = $62.3k

Taxable income = $62.3k – 8.5k = $58.8k

Tax on $26k = $3.9 k + $0.85k = $4.75k

Tax on 36.3 k = $9.075k + $4.7k = $13.775k

Hence, total tax on income = $18.525k

b. the marginal tax rate of the person is 25%

c.

Average tax = total tax / total income

= 18.525/ 75 = 24.7%

d.

Yes the tax system is progressive because income of person raises the tax rate on each dollar earned increases.

Progressive tax rate is a rate that rises on rises in income of a person

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