Final answer:
The average tax rate is calculated by dividing total taxes paid by total income and multiplying by 100, which is Option C. It reflects what portion of income is paid in taxes. Unlike the marginal tax rate, which applies to the last dollar earned, the average tax rate provides an overall picture of the tax burden.
Step-by-step explanation:
Understanding tax rates is essential for individuals and businesses to comprehend their financial obligations to the government. Specifically, the question at hand involves determining the average tax rate, which is a measure of the proportion of income paid in taxes. The correct formula for calculating this rate, based on the reference information provided, is C. (total tax ÷ total income) × 100. This formula is indicative of how much of one's income is consumed by taxes on average. For instance, if an individual earns $20,000 and pays $2,581.25 in taxes, the average tax rate would be calculated as ($2,581.25 ÷ $20,000) × 100, which equals 12.9 percent.
In contrast to the average tax rate, the marginal tax rate is the rate applied to the last dollar earned and is often higher than the average tax rate in progressive tax systems, such as those utilized in the United States. Progressive taxation means that as a taxpayer's income increases, so does the tax rate applied to their income within given thresholds. Consequently, higher-income households face higher marginal tax rates, which is illustrated by the example of a taxpayer with an income of $35,000 being subject to a 15% marginal tax rate.
Understanding these tax concepts is crucial for personal financial planning and contributes to informed decision-making regarding investments, savings, and consumption. Tax rates directly affect disposable income and hence can influence broader economic factors like consumer spending and savings rates.