Computing the implicit marginal tax rate Suppose Caroline is a single parent wit

Question

Computing the implicit marginal tax rate

Suppose Caroline 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 Caroline resides.

Compute the spendable income level Caroline would have at each level of earned income, and enter these values in the last column.

If Caroline's income from work increased from $12,000 to $18,000, her implicit marginal tax rate would be (41.4%, 49.7%,57.3%,150.3%) .

If Caroline's income from work increased from $18,000 to $24,000, her implicit marginal tax rate would be (44.8%,51.3%,60.7%,148.7)

Earned Income from Work Transfer Benefits Income and Employment Taxes Spendable Income (Dollars) (Dollars) (Dollars) (Dollars) 0 9,987 0 9,987 6,000 8,827 272 12,000 7,368 710 18,000 5,201 1,525 24,000 2,620 2,023 30,000 1,419 2,665

Explanation / Answer

As income will increase so will the tax rate and use slab as given with increase in range, will increase your tax. Till, 6000 there will be no tax effect but for the income range of 12000. Taxes will increase as mentioned in implicit marginal tax rate, But range is limited to only one of the two mentioned in the question as question does not mention about double taxation. Otherwise calculation would have been different. As Marginal rate of taxes increase as more you earn same is inherent in the given question, Since income from work increase limit of tax also increases.

Earned Income from Work Transfer Benefits Income and Employment Taxes Taxes on incremental as calculated after range Spendable Income (Dollars) (Dollars) (Dollars) (Dollars) 0 9,987 0 0 9,987 6,000 8,827 272 0 14,555 12,000 7,368 710 4968 13,690 18,000 5,201 1,525 9,018 12,658 24,000 2,620 2,023 8,922 15,675 30,000 1,419 2,665 17,844 10,910

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