ARE201Lecture11aNotes

ARE201Lecture11aNotes - Lecture 11 Taxes 1 Average Tax Rate...

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Lecture 11: Taxes 1. Average Tax Rate = taxes paid divided by income of taxpayer For U.S., average tax rate is around 30% 2. Marginal Tax Rate = change in taxes paid divided by change in income For a “flat tax”, where all income is taxed at the same rate, the average tax rate and the marginal tax rate will be the same. But for many taxes, especially the income tax, where the percentage of income paid in taxes increases with increases in the taxpayer’s income, the marginal tax rate will not be the same as the average tax rate. The marginal tax rate is the more relevant economic concept because it tells the taxpayer how his/her taxes change with changes in income – example – how much additional taxes will be paid from a pay raise. 3. FICA (federal insurance contribution act) taxes Fund Social Security and Medicare Employee and employer both pay equal amounts Self employed person pays entire amount For 2005, Medicare part is 1.45% on all earnings (paid by both employee and employer) For 2005, Social Security part is 6.2% on all earnings up to $90,000 (also paid by both employee and employer) Why stop at $90,000? Because Social Security retirement benefits paid back to the person don’t increase beyond $90,000 So, notice; Marginal tax rate for Medicare is always 1.45% Marginal tax rate for Social Security is 6.2% up to earnings of $90,000 and then 0% for earnings above $90,000
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This note was uploaded on 10/22/2009 for the course ARE 201 taught by Professor Eryuruk during the Fall '08 term at N.C. State.

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ARE201Lecture11aNotes - Lecture 11 Taxes 1 Average Tax Rate...

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