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Handout 12 Key

# Handout 12 Key - Econ 3140-2 Fall 2009 Handout#12 Answer...

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Econ 3140-2 Fall 2009 Handout #12 Answer Key 1. (Question Four from Abel et.al., Chapter 15, numerical problems) (a) In this situation, someone earning income Y between \$8 ; 000 and \$20 ; 000 pays a total tax of T = (0 : 25) ° ( Y ± \$8 ; 000) , while someone earning between \$20 ; 000 and \$30 ; 000 pays tax of T = \$3 ; 000 + (0 : 30) ° ( Y ± \$20 ; 000) . Someone with income of \$16 ; 000 then pays tax of (0 : 25) ° (\$16 ; 000 ± \$8 ; 000) = \$2 ; 000 . This gives an average tax rate of \$2 ; 000 \$16 ; 000 = 12 : 5% , while the marginal tax rate is 25% . Someone with income of \$30 ; 000 then pays tax of \$3 ; 000 + (0 : 30) ° (\$30 ; 000 ± \$20 ; 000) = \$6 ; 000 . This gives an average tax rate of \$6 ; 000 \$30 ; 000 = 20% , while the marginal tax rate is 30% . (b) In this situation, someone earning income Y between \$6 ; 000 and \$20 ; 000 pays a total tax of T = (0 : 20) ° ( Y ± \$6 ; 000) , while someone earning between \$20 ; 000 and \$30 ; 000 pays tax of T = \$2800 + (0 : 30) ° ( Y ± \$20 ; 000) . Someone with income of \$16 ; 000 then pays tax of (0 : 20) ° (\$16 ; 000 ± \$6 ; 000) = \$2 ; 000 . This gives an average tax rate of \$2 ; 000 \$16 ; 000 = 12 : 5% , while the marginal tax rate is 20% . Someone with income of \$30 ; 000 then pays tax of \$2 ; 800 = (0 : 30) ° (\$30 ; 000 ± \$20 ; 000) = \$5 ; 800 . This gives an average tax rate of \$5 ; 800
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