Principles of Microeconomics
Principles of Microeconomics
7th Edition
ISBN: 9781305156050
Author: N. Gregory Mankiw
Publisher: Cengage Learning
Question
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Chapter 12, Problem 4PA
To determine

State income tax, federal payroll tax, federal income tax, average tax rate, marginal tax rate.

Expert Solution & Answer
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Explanation of Solution

State income tax amount can be calculated as follows:

State income tax=Income×Tax rateState=30,000×0.04=1,200

State income tax is $1,200.

Federal payroll tax can be calculated as follows:

Federal payroll tax=Income×Tax rateFederal payroll=30,000×0.153=4,590

Federal payroll tax is $4,590.

Federal income tax can be calculated as follows:

Federal income tax=(9,075×Tax rateIncome range 0 to 9,075)+((Income9,0785)×Tax rateIncome range 9,075 above)=(9,075×0.1)+((30,0009,075)×0.15)=907.5+3,138.75=4,046.25

The Federal income tax is $4,046.25.

Average tax rate can be calculated as follows:

Average tax rate=State income tax + Federal payroll tax + Federal income taxTotal income =1,200+4,590+4,046.2530,000=9,836.2530,000=0.3278

The average tax rate is 32.78%.

Marginal tax rate is calculated as follows:

Marginal tax rate = Total tax rate for the income above $9,075=0.15+0.153+0.04=0.343=34.3%

The marginal tax rate is 34.3%.

New state income tax amount can be calculated as follows:

State income tax=Income×Tax rateState=60,000×0.04=2,400

The State income tax is $2,400.

Federal payroll tax can be calculated as follows:

Federal payroll tax=Income×Tax rateFederal payroll=60,000×0.153=9,180

The Federal payroll tax is $9,180.

Federal income tax can be calculated as follows:

Federal income tax=((9,075×Tax rateIncome range 0 to 9,075)+((36,9009,075)×Tax rateIncome range 9,075 to 36,900)+((Income36,900)×Tax rateIncome range above 36,900))=(9,075×0.1)+((36,9009,075)×0.15)+((60,00036,900)×0.15)=907.5+4,173.75+5,775=10,856.25

The federal income tax is $410,856.25.

New average tax rate can be calculated as follows:

Average tax rate = Total taxesTotal income=State income tax + Federal payroll tax + Federal income taxTotal income =2400+9180+10856.2530000=22436.2530000=0.374=37.4%

The average tax rate is 37.4%.

New marginal tax rate can be calculated as follows:

Marginal tax rate = Total tax rate for the income above $9,075=0.15+0.153+0.04+0.25=0.443=44.3%

The marginal tax rate is 44.3%.

Economics Concept Introduction

Concept introduction:

Marginal tax rate: Marginal tax rate is the rate by which the taxes increase from an additional dollar of income.

Average tax rate: Average tax rate is defined as the total amount of taxes paid divided by total income.

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