Question

During​ 2015, the Smiths and the Jones both filed joint tax returns. For the tax year ended December​ 31, 2015, the​ Smiths' taxable income was $105,000​, and the Jones had total taxable income of $52,500.

a. Using the federal tax rates given in Table​ 1.2,

   Taxable Income
Tax Rates   Joint Returns
10%   $0 to $18,150
15%   $18,151 to $73,800
25%   $73,801 to $148,850
28%   $148,851 to $226,850
33%   $226,851to $405,100
35%   $405,101 to $457,600
39.6%   Over $457,600

​, for married couples filing joint​ returns, calculate the taxes for both the Smiths and the Jones.

b.Calculate and compare the ratio of the​ Smiths' to the​ Jones' taxable income and the ratio of the​ Smiths' to the​ Jones' taxes. What does this demonstrate about the federal income tax​ structure?

Answer 1

Solution:-

(a)

Smith's tax liability= ($18,150-$0)*10% + ($73,800-$18,150)*15% + ($105,000-$73,800)*25%= $17,962.5

Smiths' average tax rate= $17,962.5/$105,000= 17.11%

Jones tax liability= ($18,150-$0)*10% + ($52,500-$18,150)*15%= $6,967.5

Jones average tax rate= $6,967.5/$52,500= 13.27%

(b)

Ratio of Smiths to Jones taxable income= $105,000/$52,500= 2 times

Ratio of Smiths to Jones tax liability= $17,962.5/$6,967.5= 2.58 times

As we can see that while Smiths income is twice that of Jones income, the tax liability of Smiths is 2.58 times the tax liability of Jones. This tells that the Federal tax structure taxes higher income levels at a higher tax rate than the incomes at a lower level. In other words, the person who has a higher income pays tax at a higher rate than the person with comparatively lower income.