The income tax system in a country requires each citizen to pay 10% of income on

Question

1. The income tax system in a country requires each citizen to pay 10% of income on earnings up to $40,000, and then pay 20% on any earnings over $40,000.  If an individual has an income of $69971, then what is his marginal tax rate, in percentage terms?
2. The income tax system in a country requires each citizen to pay 10% of income on earnings up to $40,000, and then pay 20% on any earnings over $40,000.  If an individual has an income of $87989, then what is his average tax rate, in percentage terms?

Explanation / Answer

1. total tax imposed = 40000 * 0.10 + (69971-40000) * 0.2 = 4000 + 29971 *0.2

= 4000 + 5994.2

= $9994.2

marginal tax rate = [delta (Tax)/delta (income)]*100

= [(9994.2 - 4000)/69971 - 40000)]*100 = [5994.2/29971]*100

= 20%.

2. total tax imposed = 40000 * 0.10 + (87989-40000) * 0.2 = 4000 + 47989 *0.2

= 4000 + 9597.8

= $13597.8

average tax rate = 13597.8 * 100 / 87989

= 15.45%

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