Assignment:
1. Based upon the following scenarios, calculate/determine (1) federal taxes paid, (2) average tax rate, and (3) marginal tax rate
2. Comment and discuss on where the structure of our federal income system is (1) progressive, (2) proportional, or regressive. Be specific
In we analyzed the structure of our federal, state, and local tax structure. In order to determine federal income taxes due for a person or family, we need to know the following information for calculating federal income taxes (we are making a simplifying assumption that there are no other credit or deductions).
1. Gross Income (we will assume income is earned income/W-2 income)
2. Standard Exemption
3. Personal Exemption
In order to determine taxable income, you would make the following calculation:
Gross Income minus Standard Exemption minus Personal Exemption
Go to the following website at https://taxfoundation.org/article/2015-tax-brackets. Table 1 will provide you with (1) taxable income brackets, rates filing status exemptions, and personal exemptions.
For 2015, the standard exemptions are as follows:
1. Single or Married Filing Separately - $6,300
2. Married Filing Jointly - $12,600
3. Head of Household - $9,250
For 2015, the personal exemption is as follows:
1. $4,000 per exemption.
SCENARIO #1
A married couple earns $84,367. They have four children. Determine the following for taxable year 2015:
1. Federal Income Tax Due
2. Average Tax Rate
3. Marginal Tax Rate
SCENARIO #2
A single person earns $91,254. Determine the following:
1. Federal Income Tax Due
2. Average Tax Rate
3. Marginal Tax Rate
SCENARIO #3
A person who qualifies to be the Head of Household earns $254,668. The head of household has two children. Determine the following:
1. Federal Income Tax Due
2. Average Tax Rate
3. Marginal Tax Rate
SCENARIO #4
A person who qualifies to be the Head of Household earns $72,898. The head of household has one child. Determine the following:
1. Federal Income Tax Due
2. Average Tax Rate
3. Marginal Tax Rate
Problem II (10 points)
In Transylvania, the basic income tax system is fairly simple. The first 40,000 sylvers (the official currency of Transylvania) earned each year are free of income tax. Any additional income is taxed at a rate of 25%. In addition, every individual pays a social security tax, which is calculated as follows:
• All income up to 80,000 sylvers is taxed at an additional 20% but there is no additional social security tax on income above 80,000 sylvers.
a. Calculate the marginal tax rate (including income tax and social security tax for Transylvania with the following levels of income: (1) 20,000 sylvers; (2) 40,000 sylvers; and (3) 80,000 sylvers).
HINT: You can calculate the marginal tax rate as the percentage of an additional 1 sylver in income that is taxed away.
b. Is the income tax in Transylvania progressive, regressive, or proportional?
Is the social security tax progressive, regressive, or proportional?
c. Which income group's incentives are most adversely affected by the combined income and social security tax systems?
Problem III (10 points).
The accompanying table shows the price and yearly quantity sold of souvenir T-shirts in the town of Crystal Lake according to the average income of the tourists visiting.
Price of T-Shirts Quantity of T-Shirts Demanded When Income is $20,000 Quantity of T-Shirts Demanded When Income is $30,000
$4 3,000 5,000
$5 2,400 4,200
$6 1,600 3,000
$7 800 1,800
a. Using the midpoint method, calculate the price elasticity of demand when the price of a T-shirt increases from $5 to $6 and the average tourist income is $20,000. Also, calculate it when the average tourist income is $30,000.
b. Using the mid-point formula, calculate the income elasticity of demand when the price of a T-shirt is $5 and the average tourist income increases from $20,000 to $30,000. Also, calculate it when the price rises to $6.
CONCLUSIONS
Write a summary report of your analysis of Problems I, II, and III. Include all of your calculations in your report.
The report may be submitted by hard copy or email on or before April 19, 2016. No late assignments will be accepted.