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Assignment on income taxes

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Reference no: EM132904797

Income Taxes.

Assume all income, capital gains, interest, salary, dividends and carried interest in private equity funds are taxed at the same rate. No deductions and no credits. Suppose marginal tax rate (MTR) is defined as = + where the variable I is taxable income and C is a constant.

Part A) What is the value of C so that 30% of your next dollar of taxable income goes to the tax authorities when you are earning a mere $30,000 per year?

Part B) Under this value of C, what is your total income tax due if you are an investment banker,

earning $150,000 per year?

Part C) Under this same value of C, assume a couple in which one earns $30,000 and the other earns $150,000. What is the total gain from splitting income in this tax system? How much tax will they save if they can split income equally?

(Hint: think in terms of 10,000 income brackets.)

Reference no: EM132904797

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