Question

Suppose tax rate on first $10,000 income is 0 percent; 10 percent on next $20,000; 20 percent on next $20,000; 30 percent on next $30,000; and 40 percent on any income over $80,000. Family A has income of $40,000 Family B has income of $100,000. What is marginal and average tax rate for each family?

Answer 1

Answer:

Ans. Marginal Tax Family A=20% Marginal Tax Family B=40%

Average tax rate Family A=10% Average tax rate Family B=23%

Explanation:

Hi, first let´s clarify what marginal tax is:

Marginal tax: it is called marginal tax rate the highest percentage of income tax that somebody pays given its net income.

Since family A´s net income is 40,000, the last income fraction fits within the the 20% bracket, therefore, its marginal tax rate is 20%

On the other hand, Family B reaches the 40% bracket, so its marginal tax rate is 40%

Average tax rate

The best way to find the average tax rate is to calculate the weighted average of the taxes to pay times its tax rates, perhaps math can clarify this in a better way, check out the following equation for Family A.

$Average T.Rate=\frac{(10000x0+20000x0.1+10000x0.2)}{40000} =0.1$

0.1 means 10% (10/100) and 0.2 is 20%. Notice that the final value (10000x0.2) is because family A for its first 10K pays 0%, for the next 20K pays 10% and since the have already paid for 30K of their income, lastly they pay 10000x0.2 = 2000 for the remaining 10000 of net income.

In the case of Family B, this is what it should look like.

$Average T.Rate=\frac{(10000x0+20000x0.1+20000x0.2+30000x0.3+20000x0.4)}{100000} =0.23$

So, Family A´s average tax rate is 10% (0.1) and Family B 23% (0.23)

Best of luck.