When taxable income rises from $40,000 to $60,000,

A) Your average tax rate is greater than your marginal tax rate.
B) Your marginal tax rate is greater than your average tax rate.
C) Your marginal and average tax rates are equal.
D) It is impossible to determine if your average or marginal tax rate is higher.

Question

Gabby Abbott · Accepted Answer

Final Answer : B, Explanation :  The marginal tax rate is the rate at which the last dollar of income is taxed. From $40,000 to $60,000, the taxes paid increase from $2,000 to $4,000, which means an additional $2,000 in taxes on an additional $20,000 of income, resulting in a marginal tax rate of 10% ($2,000/$20,000). The average tax rate is the total taxes paid divided by the total income. At $60,000, the taxes paid are $4,000, so the average tax rate is 6.67% ($4,000/$60,000). Therefore, the marginal tax rate (10%) is greater than the average tax rate (6.67%).

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