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Homework answers / question archive / [A woman] had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn't make ends meet any more

[A woman] had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn't make ends meet any more

Economics

[A woman] had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn't make ends meet any more. I told her I didn't know what I could do for her, but agreed to meet with her. She showed me all her pay stubs etc. . . . She lost [a tax subsidy for] health insurance and instead had to pay [$2,760 extra] for her employer-provided health insurance. Her rent . . . went up by 30% of the income gain (which is the rule) [because she lost part of her housing subsidy]. She lost the [$3,360 tax subsidy] . . . for after-school care for her child. [Finally, she owed $1,600 extra in taxes.]." - Prof. Liebman, HKS

(a) Calculate the effective marginal tax rate. The effective marginal rate means you factor in all the changes in both her official taxes and changes to any subsidies mentioned for this woman.

(b) In the example above you should find the marginal tax rate is above 30%. Many people making more than this woman pay far below 30% marginal tax rates. Does that mean the U.S. does not have a progressive tax system?

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