Suppose that the government taxes income in the following fashion: 30 percent of the first $20,000,50 percent of the next $30,000,and 60 percent of all income over $50,000.George earns $40,000,and Elaine earns $60,000.Which of the following statements is correct?

Question

Quizplus · Accepted Answer

For George:
His average tax rate = total taxes paid/total income 
= (30% of $20,000) + (50% of $10,000) / $40,000 
= $6,000 / $40,000 
= 15%
 
His marginal tax rate is the tax rate on the last dollar earned, which is 50%, since he falls into the second tax bracket.

For Elaine:
Her average tax rate = total taxes paid / total income 
= (30% of $20,000) + (50% of $30,000) + (60% of $10,000) / $60,000 
= $20,000 / $60,000 
= 33.33%

Her marginal tax rate is 60%, since she falls into the third tax bracket.

Suppose That the Government Taxes Income in the Following Fashion