(e) (i) Define the term Marginal rate of tax.
The proportion of any additional income which must be paid as tax.
Fred is a low-wage worker in Fairland. As a result of the minimum wage his income will increase from $15,000 per year to $19,000 per year.
(ii) Calculate how much additional income tax Fred will need to pay.
Fred initially pays – 5% of the 1st $10,000 of income that he makes = $500
Fred also pays - 10% of the $5,000 of income that he makes = $500
Therefore Fred pays $1,000 of tax on his old income
Then he gets a raise to $19,000
Fred will pay 5% on the 1st $10,000 of income that he makes = $500
Fred also pays 10% of the next $8,000 of income = $800
Fred also pays 20% on the next $1,000 that he earns = $200
Fred pays $1,500 on the new income that he earns.
Originally Fred paid $1,000 of tax now with the raise Fred pays $1,500 so the change in tax would be $500.
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