Asked by Ashley Kenny on May 07, 2024
Verified
If we want to gauge how much the income tax system distorts incentives, we should use the
A) average tax rate.
B) ability-to-pay principle.
C) total tax revenue collected.
D) marginal tax rate.
Marginal Tax Rate
The rate at which the last dollar of income is taxed, reflecting the percentage of additional income that is paid in taxes.
Average Tax Rate
The ratio of the total amount of taxes paid to the total income, showing the share of income that goes to taxes.
Income Tax System
The framework by which governments collect a percentage of income from individuals and businesses as tax, which varies according to earnings levels.
- Absorb the details pertaining to marginal and average tax rates.
- Assess the impact of fiscal regulations on economic activity and equity.
Verified Answer
RK
Ritoug KelenjibashianMay 10, 2024
Final Answer :
D
Explanation :
The marginal tax rate is the correct choice because it measures the rate at which the last dollar of income is taxed, thus directly affecting individuals' incentives to earn additional income. It is the most relevant rate when considering the distortion of economic behavior, such as work effort or investment, due to taxation.
Learning Objectives
- Absorb the details pertaining to marginal and average tax rates.
- Assess the impact of fiscal regulations on economic activity and equity.