Suppose the tax rate on the first $10,000 income is 0 percent; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $30,000; and 40 percent on any income over $80,000. Family A has income of $40,000. What is the marginal and average tax rate for Family A?

Question

Quizplus · Accepted Answer

- Family A falls into the 2nd tax bracket for income between $10,000 and $30,000, so they pay 10% on the next $20,000, which is $2,000. 
- Therefore, their marginal tax rate is 10%, which is the tax rate on the next dollar earned. 
- To find their average tax rate, we divide their total tax by their income: 
($2,000 / $40,000) x 100% = 5%
- So their average tax rate is 5%, which is lower than their marginal tax rate, because they only pay the higher tax rates on the portion of income that falls into those brackets.

Suppose the Tax Rate on the First $10,000 Income Is