Which of the following is FALSE of the progressive tax system in the U.S. for couples filing a joint tax return who earn more than $100,000 of income? The marginal tax rate starts out low (for low levels of income) and ends up high (for high levels of income. Total tax paid divided by total income earned is equal to the average tax rate These couples will pay more in taxes compared to couples who make $50,000 of income The average tax rate will be greater than the highest marginal tax rate. Income is separated into brackets, and the higher income amounts get taxed at a higher rate compared to lower income amounts
Which of the following is FALSE of the progressive tax system in the U.S. for couples filing a joint tax return who earn more than $100,000 of income?
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The marginal tax rate starts out low (for low levels of income) and ends up high (for high levels of income. |
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Total tax paid divided by total income earned is equal to the average tax rate |
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These couples will pay more in taxes compared to couples who make $50,000 of income |
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The average tax rate will be greater than the highest marginal tax rate. |
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Income is separated into brackets, and the higher income amounts get taxed at a higher rate compared to lower income amounts |
ANSWER:-
Option 4: "The average tax rate will be greater than the highest marginal tax rate." is FALSE.
Explanation:-
In a progressive tax system, the highest marginal tax rate is always greater than the average tax rate. The average tax rate is calculated as the total tax paid divided by the total income earned. The highest marginal tax rate applies to the highest bracket of income.
Example:-
For example, imagine income under $100,000 is taxed at 10%, income between $100,000 and $300,000 is taxed at 15% and income over $300,000 is taxed at 25%. Now consider individuals who both hit the upper tax bracket of 25% had taxable income of $360,000.
Individuals would pay 10% on their first $100,000 of income, or $10,000. And then pay 15% percent on their income between $100,000 and $300,000, or $30,000 (15% of $200,000).
Finally, also pay 25% on their earnings over the $300,000 threshold. For the individual with $360,000 in taxable income, that would come to $15,000 (25% of $60,000)
Their total tax obligations would be $55,000
Average Tax Rate (AVR) is 15.3% ($55,000 divided by $360,000)
or alternatively
Average Tax Rate (AVR) = Total Tax ÷ Taxable Income
Total Tax = Average Tax Rate (AVR) * Taxable Income
The highest marginal tax rate refers to the highest tax bracket into which their income falls.
Total Tax < Highest marginal tax rate * Taxable Income, as progressive income system
So, Average Tax Rate (AVR) < Highest marginal tax rate
i.e. 15.3% < 25%
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