Question 1

Total taxes paid divided by total income is called the

Accepted Answer

The total taxes paid divided by total income is referred to as the average tax rate. It is a measure of the percentage of income that goes towards paying taxes. The other options, such as lump-sum tax liability, marginal tax rate, and average consumption tax liability, refer to different tax concepts and do not apply to this scenario.

Question 2

Sue earns income of $80,000 per year. Her average tax rate is 40 percent. Sue paid $4,500 in taxes on the first $30,000 she earned. What was the marginal tax rate on the rest of her income?

Accepted Answer

Sue's total tax is 40% of $80,000, which is $32,000. She paid $4,500 on the first $30,000, leaving $27,500 in taxes on the remaining $50,000. The marginal tax rate is $27,500 / $50,000 = 55%.

Question 3

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 are the tax liability and the marginal tax rate for a person whose income is $50,000?

Accepted Answer

For the first $40,000 of income, the tax rate is 10 percent, so the tax liability is $4,000 ($40,000 x 0.10). 
For the remaining $10,000 of income (income above $40,000), the tax rate is 20 percent, so the tax liability is $2,000 ($10,000 x 0.20). 
Therefore, the total tax liability is $6,000 ($4,000 + $2,000). 
The marginal tax rate is the rate at which the next dollar of income would be taxed, so for someone making $50,000, their marginal tax rate would be 20 percent.

Question 4

A person's average tax rate equals her

Accepted Answer

The average tax rate is defined as the ratio of total tax liability to total income. Therefore, the correct option is C as it represents the formula for calculating average tax rate.

Question 5

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 is the rate at which the last dollar earned is taxed. In this case, the last dollar earned was taxed at $0.25, which means your marginal tax rate is 25 percent. The average tax rate is the total amount of taxes paid divided by your income, which in this case would be ($10,000/$50,000) = 0.20 or 20 percent. Therefore, choice C is the correct answer.

Question 6

Tim earns income of $60,000 per year and pays $21,000 per year in taxes. Tim paid 20 percent in taxes on the first $30,000 he earned. What was the marginal tax rate on the second $30,000 he earned?

Accepted Answer

Tim paid $6,000 (20% of $30,000) on the first $30,000. He paid a total of $21,000 in taxes, so he paid $15,000 on the second $30,000. The marginal tax rate on the second $30,000 is $15,000/$30,000 = 50%.

Question 7

High marginal income tax rates

Accepted Answer

High marginal income tax rates create a disincentive to work as individuals may feel that the benefits of working harder or longer do not outweigh the costs of paying higher taxes. As a result, they may choose to reduce their labor supply, which leads to a reduction in economic output and a deadweight loss.

Question 8

James earns income of $90,000 per year. His average tax rate is 40percent. James paid $5,500 in taxes on the first $40,000 he earned. What was the marginal tax rate on the rest of his income?

Accepted Answer

James paid $5,500 on the first $40,000, which is an average tax rate of 13.75% on that portion. To find the marginal tax rate on the remaining $50,000, we calculate the total tax paid ($90,000 * 40% = $36,000) minus the $5,500 already paid, which is $30,500. The marginal tax rate is $30,500 / $50,000 = 61%.

Question 9

Scenario 12-4
A taxpayer faces the following tax rates on her income:
20 percent of the first $40,000 of her income;
30 percent of all her income above $40,000.
-Refer to Scenario 12-4. The taxpayer faces

Accepted Answer

When the taxpayer's income is $50,000, she pays 20% on the first $40,000 ($8,000) and 30% on the next $10,000 ($3,000), totaling $11,000 in taxes. The average tax rate is $11,000/$50,000 = 22%.

Question 10

Nancy paid a tax of $0.50 on the last dollar she earned in 1999. Nancy's marginal tax rate in 1999 was

Accepted Answer

The marginal tax rate is the tax rate applied to the last dollar earned. Since Nancy paid $0.50 on the last dollar she earned, her marginal tax rate was exactly 50 percent.

Question 11

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 tax rate on the next dollar earned, so we need to find the tax rate on the next $10,000 earned above the $50,000 threshold. The tax rate on the first $50,000 is 20 percent, so the tax paid on that income is $50,000 x 0.20 = $10,000. That means the remaining $10,000 of income is taxed at the higher rate of 30 percent, so the tax on that income is $10,000 x 0.30 = $3,000. The total tax paid on an income of $60,000 is $10,000 + $3,000 = $13,000. The marginal tax rate is therefore the tax on the last $10,000 earned, which is $3,000. That means the marginal tax rate is 30 percent.

Question 12

The deadweight loss of an income tax is determined by the

Accepted Answer

The deadweight loss of an income tax is fundamentally determined by the marginal tax rate. This is because the higher the marginal tax rate, the greater the disincentive to work, invest, and take risks. As a result, individuals will be less likely to engage in these activities, which leads to a reduction in economic activity and a deadweight loss to society. The other options do not have a direct impact on deadweight loss.

Question 13

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 are the tax liability and the marginal tax rate for a person whose income is $30,000?

Accepted Answer

The tax liability is $3,000 (10% of $30,000), and the marginal tax rate is 10% because the income is within the first $40,000 bracket.

Question 14

Sue earns income of $80,000 per year. Her average tax rate is 30 percent. Sue paid 20 percent in taxes on the first $30,000 she earned. What was the marginal tax rate on the rest of her income?

Accepted Answer

To find out Sue's marginal tax rate, we need to know the tax rate applied to the next dollar she earns. Since Sue paid 20 percent on the first $30,000, she paid $6,000 in taxes ($30,000 x 0.20 = $6,000). This means that of the $80,000 she earned, she had $50,000 left to be taxed at a higher rate.

To find out what that rate is, we can use the formula:

Marginal tax rate = (tax paid on next dollar ÷ additional income earned)

To calculate the tax paid on the next dollar, we can subtract Sue's income over $30,000 from her total taxes paid:

$6,000 (total taxes paid) - $6,000 (taxes paid on first $30,000) = $0 (taxes paid on next dollar)

To calculate the additional income earned, we can subtract $30,000 from Sue's total income:

$80,000 (total income) - $30,000 (income taxed at 20%) = $50,000 (additional income taxed at marginal rate)

Now we can use the formula:

Marginal tax rate = ($0 ÷ $50,000) = 0%

This means that Sue's marginal tax rate on the rest of her income (above $30,000) is 0%. However, her average tax rate is still 30%, since she paid $24,000 in taxes on a total income of $80,000.

Question 15

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

Accepted Answer

The marginal tax rate is the rate at which your last dollar of income is taxed, which cannot be determined solely from total income and total tax liability. Additional information about the tax brackets and how income is distributed across those brackets is needed.

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

Scenario 12-4
A taxpayer faces the following tax rates on her income:
20 percent of the first $40,000 of her income;
30 percent of all her income above $40,000.
-Refer to Scenario 12-4. At what level of income would the taxpayer's marginal tax rate be 30 percent and her average tax rate be 25 percent?

Accepted Answer

The answer of Scenario 12-4
A taxpayer faces the following tax...

Question 18

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

Accepted Answer

The question describes a person's tax obligation as a percentage of her income, which is the definition of the average tax rate. Marginal tax rates apply to the last dollar earned and are not calculated by dividing the tax obligation by income. Private and social taxes are not applicable in this context.

Question 19

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 20

If we want to gauge how much the income tax system distorts incentives, we should use the

Accepted Answer

The marginal tax rate is the tax rate applied to an additional dollar of income, and it reflects how much of an incentive a taxpayer has to earn more income. If the marginal tax rate is too high, individuals may be less likely to work harder or invest in their businesses, as the amount they'll receive after taxes will be relatively low. Therefore, using the marginal tax rate is the best choice to gauge how much the income tax system distorts incentives.

Quiz 12: The Design of the Tax System