Question 1

Suppose the government imposes a tax of 20 percent on the first $50,000 of income and 30 percent on all income above $50,000. What is the average tax rate when income is $60,000?

Accepted Answer

The answer of Suppose the government imposes a tax of...

Question 2

Total taxes paid divided by total income is called the

Accepted Answer

Total taxes paid divided by total income gives the average tax rate, which represents the percentage of income that is paid in taxes. A lump-sum tax liability is a fixed amount of tax paid regardless of income or economic activity. Marginal tax rate is the rate of tax paid on each additional dollar of income. Average consumption tax liability is not a commonly used term in taxation.

Question 3

Suppose that the government taxes income in the following fashion: 20 percent of the first $50,000, 40 percent of the next $50,000, and 60 percent of all income over $100,000. Marshall earns $200,000, and Lily earns $600,000. Which of the following statements is correct?

Accepted Answer

Lily's income places her in the highest tax bracket for a portion of her income, which increases her average tax rate compared to Marshall, who has a portion of his income taxed at lower rates. Marshall's marginal tax rate (the rate on the last dollar earned) is the same as Lily's if we only consider the given tax brackets, but Lily's average tax rate (total tax paid divided by total income) is higher because a larger portion of her income is subject to the highest tax rate.

Question 4

A person's average tax rate equals her

Accepted Answer

The average tax rate is calculated by dividing the total amount of taxes owed by the person, which is their tax obligation, by their total income for the year. Therefore, the correct choice is C. Choice A is incorrect because the marginal tax rate is not used when calculating the average tax rate. Choice B is incorrect because it only applies to the concept of marginal tax rate and not average tax rate. Choice D is incorrect because it only reflects the change in taxes due to a change in the marginal tax rate, not the average tax rate.

Question 5

High marginal income tax rates

Accepted Answer

High marginal income tax rates discourage individuals from working harder or taking on additional opportunities as they would face a higher tax burden on each additional dollar earned. This can lead to a reduction in labor supply and productivity, ultimately harming economic growth.

Question 6

Bert faces a progressive tax structure that has the following marginal tax rates: 0 percent on the first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000, and 50 percent on all additional income. If Bert earns $75,000, what is his average tax rate?

Accepted Answer

The answer of Bert faces a progressive tax structure that...

Question 7

If your income is $50,000, your income tax liability is $10,000, and you paid $0.25 in taxes on the last dollar you earned, your

Accepted Answer

To find the marginal tax rate, we need to look at how much extra tax you would pay if you earned one more dollar. In this case, the last dollar earned was taxed at $0.25, so your marginal tax rate is 25%.

To find the average tax rate, we need to divide the total tax paid by the total income. In this case, $10,000 tax paid divided by $50,000 income equals an average tax rate of 20%.

Therefore, the best choice is C.

Question 8

Which of the following statements is correct?

Accepted Answer

The definition provided in option A is correct. The average tax rate measures the ratio of taxes paid to income earned, while the marginal tax rate measures the amount of tax paid on an additional dollar of income earned. The average tax rate reflects the sacrifice made by a taxpayer, while the marginal tax rate reflects the distortion of taxes on consumer decisions. Option B is incorrect because it presents an opposite definition of the two tax rates. Option C is incorrect because it presents an incomplete and incorrect definition of the average tax rate. Option D is incorrect because it presents an incorrect formula for the marginal tax rate.

Question 9

Pat calculates that for every extra dollar she earns, she owes the government 33 cents. Her total income now is $35,000, on which she pays taxes of $7,000. Determine her average tax rate and her marginal tax rate.

Accepted Answer

- Average tax rate = Total taxes paid / Total income = $7,000 / $35,000 = 0.2 or 20%
- Marginal tax rate = the tax rate on the last dollar earned = 33% (given in the problem)

Question 10

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. Ted earns $40,000, and Robin earns $60,000. Which of the following statements is correct?

Accepted Answer

For Ted, his first $20,000 is taxed at 30%, which is $6,000. The next $20,000 is taxed at 50%, which is $10,000. Therefore, Ted's total tax is $16,000. His marginal tax rate is the rate at which his next dollar of income will be taxed. Since Ted's income is $40,000, his marginal tax rate is 50% because any additional income will be taxed at 50%. His average tax rate is the total amount of tax paid divided by his income, which is $16,000/$40,000 = 40%.

For Robin, her first $20,000 is taxed at 30%, which is $6,000. The next $30,000 is taxed at 50%, which is $15,000. The remaining $10,000 is taxed at 60%, which is $6,000. Therefore, Robin's total tax is $27,000. Her marginal tax rate is also 50% because any additional income will be taxed at 60%. Her average tax rate is $27,000/$60,000 = 45%.

Therefore, the correct statement is B, Ted's marginal tax rate is 50%, and his average tax rate is 40%.

Question 11

If your income is $40,000 and your income tax liability is $5,000, your

Accepted Answer

Average Tax Rate = Total Tax Liability / Total Income
= $5,000 / $40,000
= 0.125
= 12.5%
Therefore, the correct answer is D.

Question 12

Sue earns income of $80,000 per year. Her average tax rate is 50 percent. Sue paid $5,000 in taxes on the first $30,000 she earned. What was the marginal tax rate on the first $30,000 she earned, and what was the marginal tax rate on the remaining $50,000?

Accepted Answer

The marginal tax rate on the first $30,000 is calculated by dividing the taxes paid ($5,000) by the income earned ($30,000), which gives 16.67 percent. For the remaining $50,000, since the average tax rate is 50 percent and Sue earns $80,000, she pays a total of $40,000 in taxes. Subtracting the $5,000 paid on the first $30,000, she pays $35,000 on the remaining $50,000, resulting in a marginal tax rate of 70 percent for the remaining income.

Question 13

A person's tax obligation divided by her income is called her

Accepted Answer

The definition given refers to the average tax rate, which is the total tax paid divided by the taxable income.

Question 14

Suppose the government imposes a tax of 20 percent on the first $50,000 of income and 30 percent on all income above $50,000. What is the marginal tax rate when income is $60,000?

Accepted Answer

When income is $60,000, the first $50,000 is taxed at 20 percent, and the remaining $10,000 is taxed at 30 percent. 
So, the total tax paid would be:
$50,000 x 0.20 + $10,000 x 0.30 = $10,000 + $3,000 = $13,000
Therefore, the marginal tax rate when income is $60,000 is 30 percent, as it is the tax rate applied to the next dollar earned above $50,000.

Question 15

Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20 percent on all income above $40,000. What is the average tax rate when income is $50,000?

Accepted Answer

The answer of Suppose the government imposes a tax of...

Question 16

Maurice faces a progressive federal income tax structure that has the following marginal tax rates: 0 percent on the first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the next $10,000, and 50 percent on all additional income. In addition, he must pay 5 percent of his income in state income tax and 15.3 percent of his labor income in federal payroll taxes. Maurice earns $60,000 per year in salary and another $10,000 per year in non-labor income. What is his average tax rate?

Accepted Answer

The answer of Maurice faces a progressive federal income tax...

Question 17

The average tax rate measures the

Accepted Answer

The average tax rate is the fraction of income paid in taxes, which is why option B is the correct choice. Option A is incorrect because it refers to spending rather than income. Option C is incorrect because it refers to the incremental rate of tax on income, which is the marginal tax rate. Option D is incorrect because it refers to deadweight loss, which is not related to the average tax rate.

Question 18

Pat calculates that for every extra dollar she earns, she owes the government 40 cents. Her total income now is $44,000, on which she pays taxes of $11,000. Determine her average tax rate and her marginal tax rate.

Accepted Answer

Average tax rate = Total taxes paid / Total income 
= $11,000 / $44,000 
= 0.25 or 25%
 
Marginal tax rate refers to the tax rate applicable on the next dollar of income. As Pat owes 40 cents on every extra dollar earned, her marginal tax rate would be 40%. So, the correct option is (D).

Question 19

Suppose the government taxes 30 percent of the first $70,000 and 50 percent of all income above $70,000. For a person earning $100,000, the marginal tax rate is

Accepted Answer

The marginal tax rate is the tax rate applied to the last dollar earned, which in this case is the income above $70,000. Therefore, the marginal tax rate for a person earning $100,000 is 50 percent since all income above $70,000 is taxed at that rate.

To calculate the average tax rate, we need to find the total amount of taxes paid and divide it by the total income. The first $70,000 is taxed at a rate of 30 percent, so the tax on that amount is:

$70,000 × 0.30 = $21,000

The remaining $30,000 is taxed at a rate of 50 percent, so the tax on that amount is:

$30,000 × 0.50 = $15,000

Therefore, the total amount of taxes paid is:

$21,000 + $15,000 = $36,000

The total income is $100,000, so the average tax rate is:

$36,000 ÷ $100,000 = 0.36 or 36 percent

Therefore, the correct answer is D, 50 percent marginal tax rate and 36 percent average tax rate.

Question 20

If we want to gauge the sacrifice made by a taxpayer, we should use the

Accepted Answer

The average tax rate, which is the total tax paid divided by total income, best measures the sacrifice made by a taxpayer because it reflects the proportion of their income that is paid in taxes.

Quiz 12: The Design of the Tax System