Suppose the income tax rate schedule is 0 percent on the first $10,000; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on any income over $70,000. Family A earns $32,000 a year and Family B
earns $70,000 a year. Both families each 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?
What will be an ideal response?
Family A's new income is $35,200 which falls into the third tax bracket. Thus, their new marginal rate is 20 percent rate and so they will pay $640 in extra taxes ($3200*0.20); Family B's new income is $77,000 which falls into the last tax bracket. Thus, their new marginal tax rate is 40 percent and so they will pay $2800 in extra taxes ($7000*0.40).
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