Suppose that the government has been taxing each person’s income at a marginal rate of 25% for every dollar in excess of $72,000 with the first $72,000 earned not taxed. In addition, the government imposes a lump-sum surcharge of $4,000 on every person who earns $120,000 or more.
a. Write out and graph the income tax, t, as a function of income before tax, x.
b. Write out and graph the income after tax, y, as a function of income before tax, x.
c. Check for continuity for this function when x = $60,000, $72,000, $100,000 and
$120,000.
d. Discuss any incentive effects on hours worked that may arise due to each identified discontinuity in the tax schedule.
a. Write out and graph the income tax, t, as a function of income before tax, x.
b. Write out and graph the income after tax, y, as a function of income before tax, x.
c. Check for continuity for this function when x = $60,000, $72,000, $100,000 and
$120,000.
d. Discuss any incentive effects on hours worked that may arise due to each identified discontinuity in the tax schedule.