Question

Use this schedule of tax rates and apply it to individuals who own a sole proprietorship or partnership business:

Taxable Income - >Tax Rate

$0 - 50,000 - > 15 %

$50,001 - 75,000 - > 25 %

$75,001 - 100,000 - > 34 %

$100,001 - 335,000 - > 39 %

$335,001 - 10,000,000 - > 34 %.

If the business has taxable income of $70,000, its average and marginal tax rates are (respectively):

a. 15.0%, 15.0%

b. 17.9%, 25.0%

c. 25.0%, 17.9%

d. 25.0%, 25.0%

e. None of the above is a correct answer.

Answer 1

From the given information we can calculate the average and marginal tax rate as follows

Given Taxable income of the company = $ 70,000

Given Schedule of Tax rate

$ 0 - $ 50,000 = 15% rate

$ 50,001 - $ 75,000 = 25% rate

$ 75,001 - $ 100,000 = 34 % rate

$ 100,001 - $ 335,000 = 39 % rate

$ 335,001 - $ 10,000,000 = 34 % rate

So here the taxable income of the company is $ 70,000 and the tax on it will be calculated as follows

For first $ 50,000 the tax will be charged at the rate of 15% for the next $20,000 tax will be charged at the rate of 25%

So the tax liability of company comes out to be

= ( 50,000 * 15% ) + ( 20,000 * 25% )

= 7500 + 5000 = $ 12,500

Average tax rate of the company is

= Tax liability / Total income

= 12500 / 70000 = 0.1785 or 17.90%

And the Marginal Tax rate is rate in which the Income of the company falls

Total Income is $ 70,000 and it falls in the income slab of $ 50,001 - $ 75,000, so the marginal tax rate of the company is 25%.

So, the Average Tax rate of the company is 17.90% and marginal tax rate is 25%

Therefore the correct answer is option (b).

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