This year, Tammy earned $15,000 and she paid 15 percent in income and payroll taxes. She qualified for Medicaid and food stamps. For every $100 that she earns, Tammy loses $35 in Medicaid benefits and $15 in food stamps. Tammy faces an effective marginal tax rate of

Question

Quizplus · Accepted Answer

First, we need to calculate Tammy's taxes. This is simply 15% of her income, or $2,250.

Next, we need to look at how her benefits are affected by her income. For every $100 she earns, she loses $35 in Medicaid benefits and $15 in food stamps. This means that for every $100 she earns, she effectively only keeps $50 ($100 - $35 - $15).

Now we can calculate Tammy's effective marginal tax rate. This takes into account both her taxes and the reduction in benefits she faces as she earns more income.

As Tammy earns more income, she will gradually lose more and more in benefits. This means that for each additional dollar she earns, she will effectively lose $0.50 ($0.35 in Medicaid benefits and $0.15 in food stamps).

So her effective marginal tax rate can be calculated as follows:

- For the first $15,000 of income, Tammy pays $2,250 in taxes and keeps $12,750 after benefits are taken into account.
- If she earns an additional $100, her benefits will be reduced by $50 (losing $35 in Medicaid benefits and $15 in food stamps). This means she effectively keeps only $50 of the extra $100 she earned.
- So her effective marginal tax rate is 50% ($50/$100).

Therefore, Choice D is the best choice.

This Year, Tammy Earned $15,000 and She Paid 15 Percent