Question

Marginal tax rates overstate the amount of personal income tax paid because the rates apply only to the income within each successive bracket. The ______ tax rate provides a more accurate picture by dividing the amount of tax paid by total taxable income.

Answer 1

Marginal tax rates apply to income within each tax bracket, while average tax rates provide a more accurate picture by dividing the amount of tax paid by total taxable income.

Step-by-step explanation:

The answer to your question lies in understanding the difference between marginal tax rates and average tax rates. Marginal tax rates refer to the tax rate paid on each additional dollar of income, while average tax rates represent the ratio of taxes paid to total taxable income. Marginal tax rates can be misleading because they only apply to the income within each successive tax bracket, giving the impression that a higher percentage of income is being taxed. On the other hand, average tax rates provide a more accurate picture of the proportion of total taxable income that is paid in taxes.

Let's consider an example to illustrate this concept. Suppose an individual has a total taxable income of $50,000 and falls into the following tax brackets: 10% for the first $10,000, 20% for the next $20,000, and 30% for the remaining $20,000. Based on the marginal tax rates, it may seem like the individual is paying 10% on the whole $50,000, 20% on the entire $50,000, and 30% on the whole $50,000. However, in reality, the tax owed in each bracket varies. Using the average tax rate, we would divide the total tax paid by the total taxable income, giving us a more accurate representation of the tax burden.