Question

Suppose a small economy has two income tax rates: 15% for all income up to $50,000 and 30% for any income earned above $50,000. Suppose that prior to the recession, the economy had five workers earning the following salaries: Amy: $20,000 Betty: $40,000 Charlie: $60,000 Dimitry: $80,000 Evelyn: $100,000 The total tax revenue paid by the five workers is _____, and it represents _____ percent of total income. a. $180,000; 18% b. $48,000; 25% c. $98,000; 32.3% d. $58,500; 19.5%

Answer 1

Answer: (a) 58500 and (b) 19.5%

Explanation:

Five workers salaries are as follows:

Amy: $20,000

Betty: $40,000

Charlie: $60,000

Dimitry: $80,000

Evelyn: $100,000

As given in the question that there are different tax slabs for different income level.

slab 1 - 15% for all income up to $50,000

slab 2 - 30% for any income earned above $50,000

Hence,

Tax paid by Amy = 20000 × 15% = $3000

Tax paid by Betty = 40000 × 15% = $6000

Tax paid by charlie = 50000 × 15% + 10000 × 30% = $10500

Tax paid by Dimitry = 50000 × 15% + 30000 × 30% = $16500

Tax paid by Evelyn = 50000 × 15% + 50000 × 30%= $22500

∴ Total tax revenue paid by the five workers = 3000+6000+10500+16500+22500

= 58,500

Tax revenue as percent of total income = $\frac{Total\ tax\ revenue}{Total\ income} \times100$

= $\frac{58500}{300000} \times100$

= 19.5%