Suppose the income tax rate schedule is 0% on the first $10,000;10% on the next $20,000;20% on the next $20,000;30% on the next $20,000;and 40% on any income over $70,000.Family A earns $28,000 a year and Family B earns $65,000 a year.Both receive a ten percent raise.What is the marginal tax rate of each and what is the extra tax paid by each after the raise?

Question

Quizplus · Accepted Answer

- For Family A: 
- Before the raise, their taxable income is $18,000 ($28,000 - $10,000). So, they fall in the 10% tax bracket, hence their current marginal tax rate is 10%. 
- After the raise, their income will be $30,800 ($28,000 + 10%), and their taxable income will be $20,800 ($30,800 - $10,000). 
- $20,800 falls in the 20% tax bracket, hence their new marginal tax rate is 20%. 
- The extra tax paid will be $360 [$20,800 * (20% - 10%)].

- For Family B: 
- Before the raise, their taxable income is $55,000 ($65,000 - $10,000). So, they fall in the 30% tax bracket, hence their current marginal tax rate is 30%. 
- After the raise, their income will be $71,500 ($65,000 + 10%), and their taxable income will be $61,500 ($71,500 - $10,000). 
- $61,500 falls in the 40% tax bracket, hence their new marginal tax rate is 40%. 
- The extra tax paid will be $2,100 [$20,000 * 10% + $20,000 * 20% + $20,000 * 30% + ($61,500 - $70,000) * 40%].

Therefore, the best choice is option C.

Suppose the Income Tax Rate Schedule Is 0% on the First