Any income tax schedule embodies two types of tax rates: average tax rates and m

Question

Any income tax schedule embodies two types of tax rates: average tax rates and marginal tax rates.

b. The marginal tax rate is defined as the extra taxes paid on additional income divided by the increase in income. Calculate the marginal tax rate for the proportional tax system as income rises from $50,000 to $100,000. Calculate the marginal tax rate as income rises from $100,000 to $200,000. Calculate the corresponding marginal tax rates for the regressive and progressive tax systems.

c. Describe the relationship between average tax rates and marginal tax rates for each of these three systems. In general, which rate is relevant for someone deciding whether to accept a job that pays slightly more than her current job? Which rate is relevant for judging the vertical equity of a tax system?

Explanation / Answer

b. I feel like part of this question is missing. I'll do my best to explain, anyhow. Under a proportional tax system, the marginal tax rate does not change as income increases. Under a regressive system, it goes down; under a progressive system, it goes up. c. Under a proportional system, marginal and average rates are the same. With a regressive system, the marginal tax rate is always less than the average tax rate; with a progressive system, marginal tax rate is greater than average tax rate. When determining how much more taxes come from working hard, marginal tax rates are most information; when determining overall equity, average tax rates are appropriate.

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