Assume that in year 1 your average tax rate is 20 percent on a taxable income of $20,000. If the marginal tax rate on the next $10,000 of taxable income is 30 percent, what will be the average tax rate if your taxable income rises to $30,000?

Question

Quizplus · Accepted Answer

First, calculate the taxes paid on the initial $20,000 of taxable income: 
$20,000 x 0.20 = $4,000

Next, calculate the taxes paid on the additional $10,000 of taxable income: 
$10,000 x 0.30 = $3,000

Total taxes paid will be $4,000 + $3,000 = $7,000

Average tax rate = Total taxes paid ÷ Total taxable income 
Average tax rate = $7,000 ÷ $30,000 = 0.233 or 23.3%

Therefore, the answer is D (about 23 percent).

Assume That in Year 1 Your Average Tax Rate Is