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Calculate the average tax rate and identify the tax in nature.
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Explanation of Solution
The average tax rate can be calculated by using formula as follows:
Substitute the respective values in Equation (1) to calculate the average tax rate for the total income $35,000 as shown below:
Thus, the average tax rate for the total income $35,000 is 0.
Table-1 shows the values of the average tax rate for different income groups obtained by using Equation (1).
Table-1
Total income |
Average tax rate |
$50,000 |
6.0% |
$65,000 |
9.2% |
$80,000 |
11.3% |
$100,000 |
13.0% |
$125,000 |
14.4% |
From table-1, it is clear that the tax is progressive in nature. There is no tax for the first $35,000. When the income rises, the tax rate also rises.
Figure-1 represents the graphical representation of the average tax rate of these different income levels.
In figure-1, the horizontal axis shows the income levels and the vertical axis shows the average tax rate. When the income rises the average tax rate also rises. Therefore the tax is progressive in nature.
Progressive tax: The progressive tax refers to the higher income people paying a higher tax amount than the lower income people.
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Chapter 19 Solutions
Principles Of Microeconomics
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