Asked by Peter Bourgeois on May 21, 2024
Verified
Assume that in year 1 you pay an average tax rate of 20 percent on a taxable income of $20,000. In year 2, you pay an average tax rate of 25 percent on a taxable income of $30,000. Assuming no change in tax rates, the marginal tax rate on your additional $10,000 of income is
A) 5 percent.
B) 12 percent.
C) 35 percent.
D) 42 percent.
Marginal Tax Rate
The rate at which the last dollar of income is taxed, indicating the percentage of tax applied to your income for each tax bracket in which you qualify.
Taxable Income
Taxable income is the portion of an individual's or company's income used as the basis to calculate the taxes owed to the government.
Average Tax Rate
The ratio of the total amount of taxes paid to the total taxable income, indicating the portion of income that is paid in taxes.
- Acquire proficiency in calculating and interpreting marginal and average tax rates.
Verified Answer
EK
Emmet KeeffeMay 22, 2024
Final Answer :
C
Explanation :
The marginal tax rate is calculated by the additional tax paid on the additional income earned. In year 1, the tax paid is 20% of $20,000 = $4,000. In year 2, the tax paid is 25% of $30,000 = $7,500. The additional tax paid on the additional $10,000 of income is $7,500 - $4,000 = $3,500. Therefore, the marginal tax rate is $3,500 / $10,000 = 35%.
Learning Objectives
- Acquire proficiency in calculating and interpreting marginal and average tax rates.