Suppose the tax rates for single wage earners are: 00000 - 9999 = 0% 10000 - 199

Question

Suppose the tax rates for single wage earners are:

00000 - 9999 = 0%
10000 - 19999 = 10%
20000 - 29999 = 22%
30000 - 39999 = 35%
40000 and above = 60%

1.)Calculate the marginal tax rate (MTR) and average tax rate (ATR) for a person earning $15,000 and one earning $35,000.

2.)Is this tax system progressive, regressive, or proportional? Describe fully

3.)Is it ever possible for the MTR = ATR? When?

4.)You earn $1,500,000. What is your MTR and ATR? How motivated are you to add to your income?

5.) Would you be in favor of a flat-tax rate system for income earners? Explain. Why would this not really simplify the tax system as many people argue -- 1 Bonus point)?

Explanation / Answer

For part 1 MTR or marginal tax rate is the tax rate payed on the last dollar earned for 15,000 this is 10% (just taken from your chart) for 35,000 this is 35% The ATR or average tax rate is calculated as follows each person pays no taxes on the first 10,000 then on all income 10-20k pays 10% for our low income friend he pays $500 $500/15,000 is 3.3% Our higher income person pays $1000 or 10% of 10-20k 2200 or 22% of 20-30k and 35% of the remaining 5000 or 1750 his total tax bill is 1000+2200+1750=7150 7150/35,000 give us 20.4% It is a progressive tax, as it taxes higher income individuals higher. Regressive does the opposit things like sales tax, proportional are the same to everyone. However often are considered regressive. 3. Yes, for anyone who earns less than 10K, otherwise marginal will always be higher 4. Again MTR is easy 60%, clearly you are not very motivated considering for every dollar you earn you keep only 40 cents ATR will be very close too 60% the steps are as before 0 on first 10k 1000 on second 10k 2200 on thrid 10k 3500 on fourth 10k 60% on remaining 1,460,000 add up taxes, divide by income. 6. I personally would not for reasons i eluded to earlier. A flat tax rate system say everyone pays 20% vastly simplifies the accounting but can in reality be a very regressive tax system. For people making very low income, 0-10k taking 20% of their income would impose a much larger burden on attaining their basic needs than a huge tax like the top rate of 60% does on higher income workers. However there are arguments to be made, saying such high tax rates discourage those high-earners from being more productive, and earning more money.

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