Question

Brenda earns $62,000 a year and pays an average annual tax rate of 15%.

Instructions: Enter whole numbers in each blank.

a. Brenda's disposable income is $  and the amount of tax she pays to the government is $  .

b. Suppose a recession hits the economy and Brenda’s income falls to $50,000 per year due to the fact that she is earning a smaller annual bonus. If she now pays an average annual tax rate of 12%, her disposable income is $  and the amount of tax she pays to the government is $  .

c. Brenda's annual salary fell by $  and her disposable income fell by $  .

d. In this example, income taxes  (Click to select)  are  are not  an automatic stabilizer.

Answer 1

a) Income = $62000 , tax = 15

Disposable income = Income – Tax

Disposable Income = 62000 – 0.15*62000

Disposable income = $52700

Tax paid= 0.15*62000 = $9300

b) Now income = $50000 and tax = 12%

Disposable income = $(1-0.12)*50000

Disposable income = 0.88*50000 = $44000

Tax paid = $6000

c) Change in annual salary = $(62000 -50000) = $12000

Change in Disposable income = $(52700 – 44000) = $8700

d) Income taxes are automatic stablizers as people tax burden decreases with fall in their income.