Chapter 19, Problem 1.2P

(a)

To determine

Calculate the values of total tax rate, average tax rate, and marginal tax rate.

Explanation of Solution

The value of total tax rate can be calculated by using the formula as follows:

$\text{Total tax rate}=\left(\begin{array}{l}\text{Base income }\\ \times \text{Tax rate}\end{array}\right)+\left(\left(\begin{array}{l}\text{Taxable income}\\ -\text{Base income}\end{array}\right)\times \text{Tax rate}\right)$ (1)

The value of the average tax rate can be calculated by using the formula as follows:

$\text{Average tax rate}=\frac{\text{Total tax rate}}{\text{Gross income}}$ (2)

The marginal tax rate is the percentage of tax applied on the income for each tax bracket.

The taxable income need to find out before calculating the total tax rate is as follows:

$\begin{array}{c}\text{Taxable income}=\text{Gross income}-\text{Amount claimed on return}\\ \text{=35,000}-6,200\\ =\$28,800\end{array}$

Taxable income is $28,800.

Substitute the respective values in Equation (1) to calculate the total tax amount for the total income $35,000 as shown below:

$\begin{array}{c}\text{Total tax rate}=\left(\text{9,075 }\times 0.10\right)+\left(\left(28,800-9,075\right)\times 0.15\right)\\ =907.50+2,958.75\\ =\$3,866.25\end{array}$

The value of total tax rate is $3,866.25.

Substitute the respective values in Equation (2) to calculate the average tax rate for the total income $35,000 as shown below:

$\begin{array}{c}\text{Average tax rate}=\frac{3,866.25}{\text{35,000}}\\ =0.110\\ =11.0\%\end{array}$

The value of average tax rate is $11.0%.

Since the tax rate levied on the last dollar of income is 15%, the marginal tax rate is 15%.

Economics Concept Introduction

Total tax: The total tax is the combined form of all taxes owed by a taxpayer for the year.

Average tax: The average tax rate is the percentage of total taxes divided by the taxable income.

Marginal tax rate: The marginal tax rate is the percentage of tax applied to additional income.

(b)

To determine

Calculate the values of total tax rate, average tax rate, and marginal tax rate.

Explanation of Solution

The taxable income need to find out before calculating the total tax rate as follows:

$\begin{array}{c}\text{Taxable income}=\text{Gross income}-\text{Amount claimed on return}\\ \text{=70,000}-6,200\\ =\$63,800\end{array}$

Taxable income is $63,800.

Substitute the respective values in Equation (1) to calculate the total tax amount for the income $70,000 as shown below:

$\begin{array}{c}\text{Total tax rate}=\left(\text{9,075 }\times 0.10\right)+\left(\left(36,900-9,075\right)\times 0.15\right)+\left[\left(63,800-36,900\right)\times 0.25\right]\\ =907.50+4,173.75+6,725.00\\ =\$11,806.25\end{array}$

Thus, the value of total tax rate is $11,806.25.

Substitute the respective values in Equation (2) to calculate the average tax rate for the total income $70,000 as shown below:

$\begin{array}{c}\text{Average tax rate}=\frac{11,806.25}{\text{70,000}}\\ =0.169\\ =16.9\%\end{array}$

Thus, the value of average tax rate is $16.9%.

Since the tax rate levied on the last dollar of income is 25%, the marginal tax rate is 25%.

Economics Concept Introduction

Total tax: The total tax is the combined form of all taxes owed by a taxpayer for the year.

Average tax: The average tax rate is the percentage of total taxes divided by the taxable income.

Marginal tax rate: The marginal tax rate is the percentage of tax applied to income for each tax bracket.

(c)

To determine

Calculate the values of total tax rate, average tax rate, and marginal tax rate.

Explanation of Solution

The taxable income need to find out before calculating total tax rate as follows:

$\begin{array}{c}\text{Taxable income}=\text{Gross income}-\text{Amount claimed on return}\\ \text{=125,000}-6,200\\ =\$118,800\end{array}$

The taxable income is $118,800.

Substitute the respective values in Equation (1) to calculate the total tax amount for the total income $125,000 as shown below:

$\begin{array}{c}\text{Total tax rate}=\left(\begin{array}{c}\left(\text{9,075 }\times 0.10\right)+\left(\left(36,900-9,075\right)\times 0.15\right)+\left[\left(89,350-36,900\right)\times 0.25\right]\\ +\left[\left(118,800-89,350\right)\times 0.28\right]\end{array}\right)\\ =907.50+4,173.75+13,112.50+8,246.00\\ =\$26,439.75\end{array}$

Thus, the value of total tax rate is $26,439.75.

Substitute the respective values in Equation (2) to calculate the average tax rate for the total income $125,000 ass shown below:

$\begin{array}{c}\text{Average tax rate}=\frac{26,439.75}{\text{125,000}}\\ =0.212\\ =21.2\%\end{array}$

Thus, the value of average tax rate is $21.2%.

Since the tax rate levied on the last dollar of income is 28%, the marginal tax rate is 28%.

Economics Concept Introduction

Total tax: The total tax is the combined form of all taxes owed by a taxpayer for the year.

Average tax: The average tax rate is the percentage of total taxes divided by the taxable income.

Marginal tax rate: The marginal tax rate is the percentage of tax applied to income for each tax bracket.

(d)

To determine

Calculate the values of total tax rate, average tax rate, and marginal tax rate.

Explanation of Solution

The taxable income need to find out before calculating total tax rate as follows:

$\begin{array}{c}\text{Taxable income}=\text{Gross income}-\text{Amount claimed on return}\\ \text{=250,000}-6,200\\ =\$243,800\end{array}$

The taxable income is $243,800.

Substitute the respective values in Equation (1) to calculate the total tax amount for the total income $250,000 as shown below:

$\begin{array}{c}\text{Total tax rate}=\left(\begin{array}{c}\left(\text{9,075 }\times 0.10\right)+\left(\left(36,900-9,075\right)\times 0.15\right)+\left[\left(83,950-36,900\right)\times 0.25\right]\\ +\left[\left(186,350-89,350\right)\times 0.28\right]+\left[\left(243,800-186,350\right)\times 0.33\right]\end{array}\right)\\ =907.50+4,173.75+13,112.50+27,160.00+18,958.50\\ =\$64,312.25\end{array}$

Thus, the value of total tax rate is $64,312.25.

Substitute the respective values in Equation (2) to calculate the average tax rate for the total income $250,000 as shown below:

$\begin{array}{c}\text{Average tax rate}=\frac{64,312.25}{\text{250,000}}\\ =0.257\\ =25.7\%\end{array}$

Thus, the value of average tax rate is $25.7%.

Since the tax rate levied on the last dollar of income is 33%, the marginal tax rate is 33%.

Economics Concept Introduction

Total tax: The total tax is the combined form of all taxes owed by a taxpayer for the year.

Average tax: The average tax rate is the percentage of total taxes divided by the taxable income.

Marginal tax rate: The marginal tax rate is the percentage of tax applied to income for each tax bracket.