Asked by Nicole Peacock on Jul 21, 2024
Verified
If you would have to pay $5,000 in taxes on $25,000 taxable income and $7,000 in taxes on $30,000 taxable income, then the marginal tax rate on the additional $5,000 of income is
A) 40 percent, and the average tax rate is about 23 percent at the $30,000 income level.
B) 50 percent, and the average tax rate is 40 percent at the $30,000 income level.
C) 40 percent, and the average tax rate is 25 percent at the $25,000 income level.
D) 30 percent, but average tax rates cannot be determined from the information given.
Marginal Tax Rate
The tax rate applied to the last dollar of income, representing the rate at which additional income is taxed.
Taxable Income
The portion of an individual’s or corporation's income that is subject to taxes by the government.
Average Tax Rate
The ratio of the total taxes paid to the overall income, found by dividing the aggregate amount paid in taxes by the total income.
- Attain expertise in computing and interpreting the nuances of marginal and average tax rates.
Verified Answer
NM
Nauman MazharJul 25, 2024
Final Answer :
A
Explanation :
The marginal tax rate on the additional $5,000 of income is calculated by the increase in tax ($7,000 - $5,000 = $2,000) divided by the increase in income ($30,000 - $25,000 = $5,000), which equals 40% ($2,000 / $5,000). The average tax rate at the $30,000 income level is the total tax paid ($7,000) divided by the total income ($30,000), which equals about 23% ($7,000 / $30,000).
Learning Objectives
- Attain expertise in computing and interpreting the nuances of marginal and average tax rates.