Question

Assume a company pays tax at a rate of 15% on its first $50,000 of income. Any income above $50,000 is taxed at 25%. If a company has $75,000 of taxable income, which of the following statements is correct?
a. Its marginal tax rate is 15%.
b. Its average tax rate is 25%.
c. Its marginal tax rate is 18.33%.
d. Its average tax rate is 18.33%.

Answer 1

Answer:

Option C, Its marginal tax rate is 18.33%. is correct

Explanation:

The tax payable on its first $50,000 of income is shown below:

tax payable=$50,000*15%=$7500

The tax payable on the remaining balance of $25,000 is computed thus:

tax payable on the balance of $25,000=$25,000*25%=$6250

Total tax payable=$7,500+$6,250=$ 13,750.00  

Marginal tax rate=tax payable/taxable income=$ 13,750.00/$75,000=18.33%