Suppose that the Government runs a pension fund to which all workers must contribute. The employee contribution rate is 6.2 percent on the first $84,900 of income. All income in excess of $84,900 is not taxed for pension purposes. What was the effective pension tax rate for a person earning $169,800?
Calculate the tax and divide by the income. Tax = .062*84900 = 5263.8.
Average rate = tax/income = .031 = 3.1%
To calculate the effective pension tax rate, you first need to determine the tax amount on the income. In this case, the employee contribution rate is 6.2 percent on the first $84,900 of income.
So, to calculate the tax on the income, you can multiply the contribution rate (0.062) by the taxable income amount ($84,900).
Tax = 0.062 * $84,900 = $5,263.80
Now, to calculate the effective pension tax rate, you divide the tax amount by the total income earned.
Effective pension tax rate = Tax / Income
In this case, the income is $169,800.
Effective pension tax rate = $5,263.80 / $169,800
Simplifying this calculation, you get:
Effective pension tax rate ≈ 0.031 or 3.1%
Therefore, the effective pension tax rate for a person earning $169,800 is approximately 3.1%.