Real World Graduation, Question 78: Tax Rates

RealWorldGraduation_Question_78_Tax_Rates   <– PDF

The U. S. has a graduated personal income tax system.  This means that income levels are divided into several levels, and those income divisions are taxed at different rates.  The tax rates increase as the amount of income increases.  The tax rate of the lowest division of income is called the “base rate”, and all the other tax rates at the higher income levels are called “marginal rates”.  As a person’s income increases, the marginal rates become higher, hence the name “graduated tax”.  For example, in tax year 2014, the income level divisions and marginal rates for single persons and married couples were:

a) 10% rate for incomes between $0 and $9075 (single person), $0 to $18150 (married)

b) 15% rate for incomes between $9075 and $36900 (single), $18150 to $73800 (married)

c) 25% rate for incomes between $36900 and $89350 (single); $73800 to $148850 (married)

d) 28% rate for incomes between $89350 and 186350 (single); $148850 to $226850 (married)

e) 33% rate for incomes between $186350 and $405100 (single); $226850 to $405100 (married)

f) 35% rate for incomes between $405100 and $406750 (single); $405100 to $457600 (married)

g) 6% rate for incomes above $406750 (single); and above $457600 (married)

There are slightly different marginal rates for “heads of household”, but those are not relevant for this topic.

The overall size of the federal government depends on how much tax revenue it can obtain. It is clear from the tax schedule above that those who earn more must generally pay more in taxes.  Some activists desire to reduce the size of the government by using a tactic they call “starving the beast”.  The idea is that if marginal tax rates are reduced, the government will receive less income tax revenue, and thus will ultimately force the government to reduce its budget targets.  The claim is that in the long run, steadily declining revenue will require the government to reduce its spending and therefore its size.  In other words, nearly all taxpayers would have more money left over from their paycheck.  In what ways could this policy “starve the beast”?

a) Money that would otherwise go to the government can be spent on appliances, cars, etc; the benefit accrues to selfish individuals and deprives the government of some revenue.

b) Money that would otherwise go to the government can be spent on furthering one’s education; the benefit accrues to selfish individuals and deprives the government of some revenue.

c) Money that would otherwise go to the government can be spent on charitable causes. The benefits accrue to the less fortunate, but deprives the government of some revenue.

d) Money that would otherwise go to the government can be spent on vacations or saved for the future; either way, the benefit accrues to selfish individuals and deprives the government of some revenue.

e) All of the above to varying degrees, depending on individual preferences.

(The answer is on p. 2 of the PDF.)

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Real World Graduation, Question 77: Small Expenses

RealWorldGraduation_Question_77_Small_Expenses   <– PDF

A certain man has a full-time job. Every work day (Monday through Friday), he spends an average of $7.00 for lunch.  His wife has offered to make him a lunch every day (which would cost about $2.00 per day).  Suppose the man took his wife up on her offer, and invested the $5.00 per day in mutual funds that received an average annual return of 8%.  Will saving these small amounts make any economic difference over the long run, say 20 or 30 years?  To assess this question, the formula for calculating the value of an investment with a fixed annual return is (neglecting inflation):

A = P(1.0 + r)n,

where P is the amount invested, r is the rate of return expressed as a decimal (8% = 0.08), n is the number of years the money is invested, and A is the value of the investment after n years.   In this case, P would be the amount saved in a year.  Inflation is ignored here because we are interested in the buying power, not the number of dollars.  (Including inflation makes the calculation more difficult, and increases the number of dollars the investment is worth, but those dollars have less buying power).  The effect of inflation does not change the general answer to this question.

a) It is not worth it because “brown-bagging” is not cool, especially if one is a white-collar worker. In our image-conscious society, people think “brown-bagging” is a sign of cheapness, and appearing cheap may impede one’s chances of getting ahead.

b) “Brown-bagging” over long periods of time is bad for the environment because several trees will probably have to be sacrificed to manufacture the bags, so it is not worthwhile.

c) It may be worthwhile for short periods when money is tight, or if one’s workplace is far away from restaurants, but is otherwise socially degrading.

d) It is not worth it; the amount accumulated will be so small that he would have been better off to enjoy buying his lunch every day.

e) It is not worth it in general, for a combination of the above reasons, and possibly some others.

(The answer is on p. 2 of the PDF.)

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Real World Graduation, Question 76: Realtors

RealWorldGraduation_Question_76_Realtors  <– PDF

When buying a house, many people use the services of realtors, who are licensed specialists in handling real-estate transactions. Usually they operate in “territories”, and acquire an extensive knowledge of the neighborhoods and school systems.  Normally they will assist the buyers in helping them get around, and “showing” the houses for sale. Their fee for this service is normally 7% of the selling price of the house, which is paid by the seller out of the proceeds of the sale.  What are the benefits of using a realtor if you are buying a house?

a) The realtor provides protection for the buyer against unscrupulous sellers, since they work directly with and therefore, have a vested interest in satisfying the buyer.

b) The services rendered by the realtor are paid by the seller, so whatever the realtor does is ultimately free to the buyer.

c) The realtor can provide legal advice on the complexities of real-estate law and regulations governing these transactions.

d) Since the realtors are licensed, the buyer can be confident that every property listed for sale is listed accurately with regard to age, conditions, known defects, and any existing liens against the property.

e) All of the above.

(The answer is on p. 2 of the PDF.)

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RealWorldGraduation_Question_75_Marital_Responsibility  <– PDF

If a married couple makes a decision about something, and the decision turns out to be wrong, which is the best method to determine who takes the responsibility for it?

a) Whoever yells the loudest gets to blame the other one.

b) The one who feels the least guilty about it has to take the blame.

c) Neither should have to take responsibility for it.

d) The couple should agree to blame someone else.

e) The couple should discuss the situation rationally and mutually agree on who should take the responsibility.

(The answer is on p. 2 of the PDF.)

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