Question

QUESTION 40

1. Suppose the tax rate on the first $10,000 income is 0 percent; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $30,000; and 40 percent on any income over $80,000. Family A has income of $50,000. What is the marginal and average tax rate for Family A?

   		marginal-10 percent; average-12 percent
   		marginal-15 percent; average-25 percent
   		marginal-25 percent; average-15 percent
   		marginal-20 percent; average-12 percent

Answer 1

Suppose the tax rate on the first $10,000 income is 0 percent; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $30,000; and 40 percent on any income over $80,000. Family A has income of $50,000. What is the marginal and average tax rate for Family A?

Income of household= 50,000 = 10,000 (Slab 1) + 20,000 (Slab 2) + 20,000 (Slab 3)
Tax on slab 1 = 0% of 10,000 = 0
Tax on slab 2 = 10% of 20,000 = 2,000
Tax on slab 2 = 20% of 20,000 = 4,000
Total tax payment = 6000
Average tax rate = 6000/50,000 = 0.12 = 12%
One additional dollar of income will lead to that additional dollar lie in the Slab 4. The tax rate in Slab 4 is 30%. So marginal tax rate is 30%