Question

Which statement is correct with respect to marginal and average tax rates under a progressive tax structure?

Multiple Choice

Generalizations cannot be made. The question can only be answered with reference to the tax situation of a specific taxpayer.

At very low levels of taxable income, a taxpayer's marginal and average tax rates will be the same.

At very high levels of taxable income, a taxpayer's marginal and average tax rates will be the same.

For most taxpayers, the average tax rate is larger than the marginal tax rate.

.

.

Jordan and Paul, a married couple, have taxable income of $46,625, which is taxed as follows:

$18,650 × 10% =	$	1,865.00
($46,625 - $18,650) × 15% =		4,196.25
Total tax liability	$	6,061.25

Their marginal tax rate is:

Multiple Choice

13%.

10%.

15%.

12.5%.

.

.

Which of the following trial courts hear tax cases?

Multiple Choice

U.S. Tax Court.

All of these.

U.S. Court of Federal Claims.

U.S. District Court.

Answer 1

Hey there !!

Lets solve part by part...do refer the explanation given for your understanding :)

Question 1

The correct option is B, at very low levels of taxable income, a taxpayer's marginal and average tax rates will be the same.

The question is based on the Progressive tax system regime, i.e. As taxable income increases, the tax rate will also increase.

And Average rate of tax is %age of total tax liability over taxable income. So in a progressive tax system, the average tax rate should always be lower than marginal tax rate because as an individual's income increases it will get taxed at a higher rate (marginal rate)

None of the options given above are correct as per the above stated concept.

The only option that seems correct is that At very low levels of taxable income, a taxpayer's marginal and average tax rates will be the same. Very low levels of income is to be considered, that is below the exemption limit. You can refer below stated example for your understanding only.

Taxable Income	Marginal Rate of tax	Avg Rate of Tax
$1,000	0%	0%
$2,000	0%	0%
$3,000	0%	0%
$4,000	0%	0%
$5,000	0%	0%

Here, Marginal rate is equal to Avg rate of tax.

So, only B option seems to be correct Question 2 The marginal tax rate is 15%. Correct option is C. As explained above, marginal tax rate is the increased tax rate on next higher level of income. So here, at first 10% tax is charged on first slab of $18,650 and then 15% on balance income. So marginal rate of tax os 15% itself. Question 3 The correct answer is All of these ( Option B) U.S. Tax CourT, US Court of Federal Claims, and US District court, All of them hear tax cases.

I hope the above solution is clear to you...do let me know in case of any concerns.

All the best :)

Happy studying :)