Eric earns a base salary of 50000 as a shipwreck diver and i

Eric earns a base salary of $50,000 as a shipwreck diver and is subject to the following (fictitious) income tax bracket. Eric is considering taking on an additional dive that will increase his income by $5,000. In order for Eric to deem the dive worth his time, this dive must earn Eric $3000 after taxes. Please round all answers, if not whole numbers, to two decimal places. What is the marginal tax rate associated with taking on this dive? Given the information above, will Eric undertake this extra dive? What is Eric\'s average tax rate if the extra dive is accepted? How much does Eric end up paying in taxes?

Solution

Marginal tax rate on dive will be 50% as the Eric already earns 50,000 , so any extra earnings above that amount will be under 50% tax bracket.

Eric will not take the dive as it will earn him less after tax dollar as against expectations. He will get after tax = 5000*(1-50%) = 2,500 , while he needs 3,000 to take dive.

Eric\'s average tax rate will be = (10000*0.05+20000*0.10+20000*0.20+5000*0.50)/ 55000

= (500+2000+4000+2500) / 55000 = 16.36%

Total taxes paid (including extra dive) = (10000*0.05+20000*0.10+20000*0.20+5000*0.50) = 9,000

Total taxes paid (excluding extra dive) = (10000*0.05+20000*0.10+20000*0.20) = 6500