Suppose Governor Meridias decides to initiate a state income tax.The first $50,000 of household income is tax-free,while any income above $50,000 is taxed at 10%.The marginal tax rate for a household earning $75,000 is:

A) greater than its average tax rate.
B) less than its average tax rate.
C) equal to its average tax rate.
D) 3.3%.

Question

Elyssa Chapman · Accepted Answer

Final Answer : A, Explanation :  The marginal tax rate is the rate at which the last dollar of income is taxed. In this scenario, any income above $50,000 is taxed at 10%, making the marginal tax rate for a household earning $75,000 exactly 10%. The average tax rate, however, is calculated by dividing the total tax paid by the total income. Since only $25,000 of the $75,000 income is taxable (at 10%), the total tax paid would be $2,500. Dividing this by the total income of $75,000 gives an average tax rate of 3.3%, which is less than the marginal tax rate of 10%.

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