I do pay taxes. My friend earns $30000 as yearly pay and pays nothing in taxes. Another friend of mine earns $60,000 as yearly pay and pays $15000 in taxes at 25% tax rate because he falls in $35000 to 65000 bracket.
Isn't the problem given above same?
I'm glad you pay taxes. If so, then you should know that how much someone earns is insufficient information to calculate his/her taxes. What is
important is what part of that income is taxable.
The point of my question is that once you get down to the "taxable" income figure, each dollar of this income is taxed according to where it lies on a scaled table of percentages. A person in a particular tax bracket only pays that percentage on income earned within that bracket, not his or her entire income.
I don't know what the real numbers are but something like first 7500 are not taxed, then 7500-15000 are taxed at 15% the 15001 to 23000 are taxed at 18% and so on. Hence, we have a scaled system similar to that of the salesperson's pay, where he make get a percentage commission on the first x items, then a different commission on anything in excess of x.
If you think about it, this is also why we have tax lookup tables -- it is not a straightforward calculation to figure out ones tax because a part of each person's income is taxed at different percentages.
Former Senior Instructor, Manhattan GMAT and VeritasPrep
Vice President, Midtown NYC Investment Bank, Structured Finance IT
MFE, Haas School of Business, UC Berkeley, Class of 2005
MBA, Anderson School of Management, UCLA, Class of 1993