Question

In Taxland, the first $20,000 of income is exempt from tax. There is a 12% tax rate on income between $20,000 and $50,000, and a 16% tax rate on all income over $50,000.

Mr. Taxi earns $90,000. His average tax rate is
and his marginal tax rate is
.

Write your answer as a percent with one decimal point: for example 2.6%

Answer 1

16.0%

16.0%

Explanation:

Given that :

First $20,000 is exempt from tax

$20000 to $50000 = 12% tax rate

Over $50000 = 16% tax rate

Earning = $90000

Since earning is greater than $50000

Tax rate = 16% = 0.16

Average tax rate = tax paid / taxable income

Tax paid = 0.16 * 90,000 = $14,400

Average tax rate = 14,400 / 90,000

Average tax rate = 0.16 = 16%

Marginal tax rate :

Change in tax paid / change in earning

Suppose ; amount earned increases to 95,000

Tax paid = 95000 * 0.16 = 15200

Change in tax paid = (15200 - 14400) = 800

Change in earning = 95000 - 90000 = 5000

= 800 / 5000

= 0.16 = 16%

Marginal tax rate = 16%