In Taxland, the first $10,000 earned per year is exempt from taxation. Between $10,000.01 and $30,000, the tax rate is 25 percent. Between $30,000.01 and $50,000 it's 30 percent. Above $50,000, it's 35 percent. You're earning $75,000 a year.
a) How much taxes will you have to pay?
b) What is your average tax rate? Your marginal tax rate?
c) Taxland has just changed to a tax credit system in which, in lieu of any exemption, eligible individuals are given a check for $4,000. The two systems are designed to bring in the same amount of revenue. Would you favor or oppose the change? Why?
a) Tax on first 10,000 = 0
tax on next 20000 = 20000*25%=5000
tax on next 20000 = 20000*30%=6000
tax on next 25000=25000*35%=8750
Total Tax = 19750
b) Average Tax rate = 19750/75000=26.33%
The distribution of income is depicted.