Question

The plant union is negotiating with the Eagle Company, which is on the verge of bankruptcy. Eagle has offered to pay for the employees' hospitaliztion insurance in exchange for a wage reduction. The employees each currently pay premiums of $4,000 a year for their insurance. Which of the following is correct:
a. If an employee's wages are reduced by $5,000 and the employee is in the 28% marginal tax bracket, the employee would benefit from the offer.
b. If an employee's wages are reduced by $4,000 and the employee is in the 15% marginal tax bracket, the employee would benefit from the offer.
c. If an employee's wages are reduced by $6,000 and the employee is in the 35% marginal tax bracket, the employee would benefit from the offer.
d. a., b., and c.
e. None of these.

Answer 1

Answer:

d. a., b., and c.

Explanation:

Reduction in pay (a) Marginal tax (b) Reduction in tax (c = a x b)

A. $5000                            0.28                              $1,400

B. $4000                             0.15                                  $600

C. $6000                              0.35                                $2100

Reduction in After-tax Income (d = a - c)

A. $3,600

B. $3,400

C. $3,900

this means that all the above a, b, and c options are correct because in all the three cases, the reduction in after-tax pay of the employee will be less than $4000 value of the nontaxable insurance premium to be paid by the employer which would ultimately benefit the employee.