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

Question

Quizplus · 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.

Suppose the Government Taxes 30 Percent of the First $70,000