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Assess marginal tax rates for the regressive and progressive tax systems.

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UP TO $27,050 15.0%
FROM $27,050 TO 65,550 27.5
FROM $65,550 TO 136,750 30.5
FROM $136,750 TO 297,350 35.5
OVER $297,350 39.1

Suppose you are a typical person in the U.S. economy. You pay 4 percent of your income in state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employee shares combined).

You also pay federal income taxes as in Table 3. How much tax of each type do you pay if you earn $20,000 a year?

Taking all taxes into account, what are your average and marginal tax rates?

What happens to your tax bill and to your average and marginal tax rates if your income rises to $40,000?

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Three Tax Systems
Proportional Tax Regressive Tax Progressive Tax

50,000 12,500 25% 15,000 30% 10,000 20%
100,000 25,000 25 25,000 25 25,000 25
200,000 50,000 25 40,000 20 60,000 30

Any income tax schedule embodies two types of tax rates - average tax rates and marginal tax rates.

a. The average tax rate is defined as total taxes paid divided by income. For the proportional tax system presented in Table 7, what are the average tax rates for people earning $50,000, $100,000, and $200,000?

What are the corresponding average tax rates in the regressive tax system?

... for the progressive tax system?

b. The marginal tax rate is defined as the extra taxes paid on additional income divided by the increase in income. Calculate the marginal tax rate for the proportional tax system as income rises from $50,000 to $100,000.

Calculate the marginal tax rate as income rises from $100,000 to $200,000.

Calculate the corresponding marginal tax rates for the regressive and progressive tax systems.

c. Describe the relationship between average tax rate and marginal tax rates for each of these three systems. In general, which rate is relevant for someone deciding whether to accept a job that pays slightly more than her current job?

Which rate is relevant for judging the vertical equity of a tax system?

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Solution Summary

Calculate the corresponding marginal tax rates for the regressive and progressive tax systems.

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** describe the major sources of income and expenditures for households... in question 1**
1) (Evolution of the household) Determine whether each of the following would increase or decrease the opportunity costs for mothers who choose not to work outside the home. Explain your answers...
a. higher levels of education for women
b. higher unemployment rates for women
c. higher average pay levels for women
d. lower demand for labor in industries that traditionally employ large numbers of women.

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Income taxes
$1000.00 $200.00
$2000.00 $350.00
$3000.00 $450.00
a. what percentage of income is paid in taxes at each level?
b. Is the tax rate progressive, proportional, or regressive?
c. What is the marginal tax rate on the first $1000.00 of income? The second $1000.00? The third $1000.00?

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**for question 4 explain why a supply curve usually slopes upward****
4) (Supply) Why is a firm willing and able to increase the quantity supplied as the product price increases?


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a. What would be the size of the U.S. labor force?
b. If 85 million adults are not working, what is the unemployment rate?

3) (Types of unemployment) Determine whether each of the following would be considered frictional, structural, seasonal, or cyclical unemployment:
a. A UPS employee who was hired for the Christmas season is laid off after Christmas.
b. A worker is laid off due to reduced aggregate demand in the economy.
c. A worker in a DVD rental store becomes unemployed as video on demand cable service becomes more popular.
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1) (measuring labor productivity) How do we measure labor productivity? How do changes in labor productivity affect the U.S. standard of living?

5) (long term productivity growth) Suppose that two nations start out in 2013 with identical levels of output per work hour--- say $100.00 per hour. In the first nation labor productivity grows by 1% per year. In the second, it grows by 2% per year. Use a calculator or spreadsheet to determine how much output per hour each nation will be producing 20 years later, assuming the labor productivity growth rates do not change. Then determine how much each will be producing per hour 100 years later. What do your results tell you about the effects of small differences in productivity growth rates?

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