Question

Which of the following statements is CORRECT?

I. The marginal tax rate is determined by dividing the tax a person pays by his taxable income.
II. In the progressive tax system, the more taxable income a taxpayer has, the higher the tax bracket in which the last dollar is taxed.
A) Neither I nor II
B) II only
C) Both I or II
D) I only

Answer 1

Only Statement II is correct, as it accurately describes how a progressive tax system works, with higher marginal tax rates for higher income brackets, but not applied to the entire income.

"The correct option is approximately option B"

Step-by-step explanation:

When considering the correctness of the statements about marginal tax rates and progressive tax systems, we must look at how these concepts are defined and how they apply in practice. Statement I is incorrect because the marginal tax rate is not determined by dividing the tax paid by the taxable income, but instead, it is the rate that applies to each additional dollar of income. This is conceptually different from the average tax rate, which is obtained by dividing the total tax paid by taxable income.

Statement II accurately describes a feature of progressive tax systems, where tax brackets are structured so that individuals with higher taxable incomes face higher marginal tax rates on their last dollar of earned income.

Therefore, as a taxpayer's income enters a higher bracket, only the income above the previous bracket's threshold is taxed at the higher rate, not the entire income.

In summary, the correct answer to the question is B) II only.