Asked by Christopher Severson on Apr 26, 2024
Verified
Suppose that the government taxes income in the following fashion: 20 percent of the first $50,000, 40 percent of the next $50,000, and 60 percent of all income over $100,000. Marshall earns $200,000, and Lily earns $600,000. Which of the following statements is correct?
A) Marshall's marginal tax rate is higher than Lily's marginal tax rate.
B) Marshall's average tax rate is higher than his marginal tax rate.
C) Lily's average tax rate is higher than her marginal tax rate.
D) Lily's average tax rate is higher than Marshall's average tax rate.
Marginal Tax Rate
The rate at which an additional dollar of taxable income would be taxed.
Average Tax Rate
The ratio of the total amount of taxes paid to the total tax base (taxable income or spending), representing the average taxation faced by an individual or firm.
Taxable Income
The amount of income that is subject to income tax after deductions and exemptions.
- Understand the concepts of marginal and average tax rates.
- Analyze the impact of different tax systems on individual and government revenue.
Verified Answer
KI
Kendall IngramApr 27, 2024
Final Answer :
D
Explanation :
Lily's income places her in the highest tax bracket for a portion of her income, which increases her average tax rate compared to Marshall, who has a portion of his income taxed at lower rates. Marshall's marginal tax rate (the rate on the last dollar earned) is the same as Lily's if we only consider the given tax brackets, but Lily's average tax rate (total tax paid divided by total income) is higher because a larger portion of her income is subject to the highest tax rate.
Learning Objectives
- Understand the concepts of marginal and average tax rates.
- Analyze the impact of different tax systems on individual and government revenue.