Question: The purpose of this problem is to determine how effective marginal tax rates are affected by the itemized deduction and personal exemption phase outs.

a. Consider a family of four whose AG1 places it in the exemption phase-out range, and whose taxable income places it in the 35 percent tax bracket.

i. In the absence of the phase-out, how much arc the family exemptions?

ii. Now suppose the family income increases by $2,500. Given a 35 percent bracket, by how much does its tax liability increase?

iii. By how much does the increase in income reduce the family's exemptions? By how much does this increase the family taxable income?

iv. By how much does the increase in tax-able income increase their tax liability, given that they are in the 35 percent bracket?

v. Combine your answers from parts ii and iv to find the effective marginal tax rate. (Divide the change in tax liability by the $2,500 change in income.)

b. Now consider a different family whose AOI places it in the deduction phase-out range, and the family itemizes its tax deductions. Suppose the family receives another $100 of before-tax income.

i. Assuming a 35 percent marginal tax rate, what is the change in tax liability?

ii. What happens to the family allowable itemized deductions and taxable income?

iii. How does the change in taxable income affect the family tax liability?

iv. What is the family effective marginal tax rate?