Question

The tax rate which is computed by simply dividing the total tax liability by the corresponding tax base is known as the:

a. capital gains tax rate.
b. average tax rate.
c. effective tax rate.
d. marginal tax rate.

Answer 1

The tax rate calculated by dividing the total tax liability by the tax base is the average tax rate, which is distinct from the marginal tax rate that applies to the last dollar of income.

Step-by-step explanation:

The tax rate which is computed by simply dividing the total tax liability by the corresponding tax base is known as the average tax rate. For example, if an individual has an income of $20,000 and pays taxes of $2,581.25, their average tax rate would be calculated as follows: $581.25 / $20,000 = 0.129, or 12.9 percent. This is different from the marginal tax rate, which is applicable to the last dollar of income and could be higher than the average tax rate. The effective tax rate depicts the average corporate tax rate on a company's income, accounting for tax benefits. Understanding the difference between these tax rates is crucial for comprehending the redistribution effect of the tax system and the economic behaviors they may encourage or discourage.