Suppose that the flat tax is 20 percent. A worker who earns $1000 before taxes and puts all of the income net of taxes into a bond that earns 10 percent per annum will pay an additional _______ in taxes from interest income next year.

Question

Quizplus · Accepted Answer

The worker earns $800 after the 20% tax on $1000. The bond earns 10% interest on $800, which is $80. The tax on this interest income is 20% of $80, which is $16. However, the question asks for the additional tax from interest income, which is $8, as the worker already paid $8 in taxes on the original $1000.

Suppose That the Flat Tax Is 20 Percent