22. Pat calculates that for every extra dollar she earns, she owes the governmen

Question

22. Pat calculates that for every extra dollar she earns, she owes the government 40 cents. Her total income no% $44,000, on which she pays taxes of $11,000. Determine her average tax rate and her marginal tax rate. a. Her average tax rate is 40 percent and her marginal tax rate is 25 percent. b. Her average tax rate is 40 percent and her marginal tax rate is 40 percent. c. Her average tax rate is 25 percent and her marginal tax rate is 25 percent. d. Her average tax rate is 25 percent and her marginal tax rate is 40 percent.

Explanation / Answer

Average tax rate is calculated as below:

Average tax rate = Total tax paid / Total income

= $11,000 / $44,000

= 0.25 or 25%

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Marginal tax rate is the rate of taxation that is payable on each and every single penny that contributes to the total income. Pat has calculated that she owes government 40 cents for every extra dollar she earns. Hence, her marginal tax rate of 40%.

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Hence, correct answer is Option D (Her average tax rate is 25 percent and her marginal tax rate is 40 percent.

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