Final answer:
The tax rate paid on the next dollar of income is the marginal tax rate, which is different from the average tax rate and is typically higher as it applies to additional income within certain brackets in a progressive tax system. Option D is correct answer.
Step-by-step explanation:
The tax rate paid on the next dollar of income is known as the marginal tax rate. This is different from the average tax rate, which is the ratio of total taxes paid to total income earned.
If you consider a taxpayer who earns $35,000 annually and faces different tax rates for different income brackets, their marginal tax rate is the rate they would pay on any additional income earned over what they already have.
For example, if the income from $9,075 to $36,900 has a 15% tax rate, and the taxpayer earns within this range, then the marginal tax rate is 15%. In contrast, their average tax rate is the total tax paid divided by their total income, which is typically less than the marginal rate because lower rates apply to the initial segments of income.
Progressive tax systems, like that of the U.S., employ marginal tax rates to ensure those with higher incomes face higher tax rates on their incremental earnings. With these points in mind, the answer to the student's question is:
d. Marginal