Question

Suppose that a nation decides to introduce a new income tax system with the tax brackets shown in the table Income range Tax rate s0-$20,000 0% $20,001-$39,000 31% $39,001-$70,000 42% $70,001+ 50% Use the table to calculate the average tax rate and marginal tax rate for each of the families. Where applicable, round your answer to the nearest whole number. Вуne family Income $25,000 Average tax rate: % Marginal tax rate: 31 Smith family Income $48,000 Average tax rate Marginal tax rate 42 20

Answer 1

Income = $25,000

Upto $20,000 income bracket, tax rate = 0%

From $20001 to $39000 income bracket, tax rate = 31%

Hence, tax liability = 31% of ($25000-$20000) = $1550

The average tax rate = $1550/$25000 = 6.2%

The marginal tax rate = 31%

--------------------------------------------------------------------------------------------------------------------------------------------------------------

Income = $48,000

For the first $20000 income bracket, tax rate is 0%

For the next $19000 income bracket, tax rate is 31%

This means, 31%*$19000 = $5890

Thus, over the income of $39000, tax liability is $5890

For the remaining $9000, tax rate is 42%

This means, 42%*$9000 = $3,780

Thus, total tax liability = $9670 over the income of $48000

Average tax rate = $9670/$48000 = 20.1458%

Marginal tax rate = 42%