Question 1

A person's average tax rate equals her

Accepted Answer

A person's average tax rate is the total amount of taxes paid divided by their income. Choice A is incorrect because it divides the tax obligation by the marginal tax rate, which is the rate at which the last dollar earned is taxed. Choice B is incorrect because it only measures the change in taxes for a $1 increase in income, not the overall average tax rate. Choice D is incorrect because it only measures the change in taxes for a 1% increase in the marginal tax rate, not the overall average tax rate.

Question 2

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 3

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

Accepted Answer

The definition provided aligns with the average tax rate, which is the total amount of tax paid divided by taxable income. Marginal tax rates refer to the rate at which additional income is taxed, while social and private tax rates are not commonly used terms in taxation.

Question 4

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 5

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 6

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

Accepted Answer

The answer of If your income is $40,000 and your...

Question 7

High marginal income tax rates

Accepted Answer

High marginal income tax rates create a disincentive to work for individuals who would be faced with a higher tax burden on additional income earned. This can result in individuals choosing to work less or avoid additional income earning opportunities in order to avoid higher taxes.

Question 8

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 9

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

The marginal tax rate is the rate at which each additional dollar of income is taxed. In this case, when income is $60,000, the first $50,000 is taxed at 20 percent, which equals $10,000, and the remaining $10,000 is taxed at 30 percent, which equals $3,000. Therefore, the total tax paid on $60,000 of income is $13,000, and the marginal tax rate is the tax paid on the last dollar of income, which is 30 percent.

Question 10

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 11

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

The marginal tax rate refers to the tax rate applied to the last dollar earned, so in this case, it is 25% (or $0.25/$1). The average tax rate refers to the total amount of taxes paid as a percentage of total income, so it is calculated as $10,000/$50,000 = 20%. Therefore, the correct choice is C.

Question 12

The average tax rate measures the

Accepted Answer

The average tax rate is defined as the total amount of taxes paid divided by the total income earned. Therefore, it measures the fraction or percentage of income that is paid in taxes.

Question 13

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

Ted's marginal tax rate is the rate at which his next dollar of income will be taxed. Since he earns $40,000, all his income falls under the first two brackets. Therefore, if he earns an additional dollar, he will pay 50 cents in taxes (50% of the marginal tax rate on the next $30,000 bracket). Hence, Ted's marginal tax rate is 50%.
Ted's average tax rate is the total tax paid divided by his total income. We can calculate this by first finding out how much tax he pays on his first $20,000 of income and his remaining $20,000 of income ($40,000 - $20,000). 
For the first $20,000, he pays 30% in taxes, which is $6,000. For the remaining $20,000, he pays 50% in taxes, which is $10,000. In total, he pays $16,000 in taxes. Therefore, his average tax rate is $16,000 / $40,000 = 40%.

Robin's marginal tax rate is the rate at which her next dollar of income will be taxed. She earns $60,000, which means her entire income falls under all three brackets. If she earns an additional dollar, she will pay 60 cents in taxes (60% of the marginal tax rate on all income above $50,000). Therefore, Robin's marginal tax rate is 60%.

Robin's average tax rate can be calculated in the same way as Ted's. For the first $20,000, she pays 30% in taxes, which is $6,000. For the next $30,000, she pays 50% in taxes, which is $15,000. For the remaining $10,000, she pays 60% in taxes, which is $6,000. In total, she pays $27,000 in taxes. Therefore, her average tax rate is $27,000 / $60,000 = 45%.

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 average tax rate when income is $60,000?

Accepted Answer

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

Question 15

Which of the following statements is correct?

Accepted Answer

The statement "The average tax rate gauges the sacrifice made by a taxpayer, whereas the marginal tax rate gauges the distortion of taxes on consumer decisions" is correct. The average tax rate measures the percentage of income paid in taxes, indicating the overall sacrifice made by the taxpayer, while the marginal tax rate measures the additional tax paid on each additional unit of income earned, indicating the distortion of taxes on consumer decisions.

Question 16

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.

Question 17

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 rate of tax paid on the last dollar earned, which in this case is 50 percent since the person's income is above $70,000. 
To calculate the average tax rate, we first need to find how much tax the person pays on their income. 
$70,000 x 0.3 = $21,000 
$30,000 x 0.5 = $15,000 
Total tax paid = $21,000 + $15,000 = $36,000 
Average tax rate = total tax paid / income 
= $36,000 / $100,000 
= 0.36 or 36% 
Therefore, the correct answer is D.

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

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 rate at which the last dollar earned is taxed, which is 33% in this case as Pat owes the government 33 cents for every additional dollar earned. Therefore, the correct choice is B.

Question 20

Total taxes paid divided by total income is called the

Accepted Answer

The average tax rate is calculated by dividing the total taxes paid by the total income, representing the proportion of income that is paid in taxes. The other options, such as lump-sum tax liability and marginal tax rate, are calculated differently and do not involve dividing total taxes paid by total income.

Quiz 12: The Design of the Tax System