Question

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

A) Tax credit
B) Tax deduction
C) Tax bracket
D) Tax rate

Answer 1

The term which is defined as the total tax paid divided by the total taxable income is known as the effective income tax rate or average tax rate, not simply 'tax rate' which can be confused with nominal or marginal tax rates.

Step-by-step explanation:

The term defined as the total tax paid divided by the total taxable income is D) Tax rate. However, it is important to note that the specific term for the ratio of total taxes paid to income is actually referred to as the effective income tax rate or average tax rate.

This calculation helps to understand what fraction of an individual's income goes towards taxes. For example, if someone has a taxable income of $20,000 and pays $2,581.25 in taxes, their average tax rate would be calculated as $2,581.25 divided by $20,000, which equals 0.129, or 12.9 percent.

While the marginal tax rate is the rate paid on an additional dollar of income, the average tax rate is a measure of the overall percentage of income that is paid in taxes.