Economics Today: The Micro View (19th Edition) (Pearson Series in Economics)
Economics Today: The Micro View (19th Edition) (Pearson Series in Economics)
19th Edition
ISBN: 9780134479255
Author: Roger LeRoy Miller
Publisher: PEARSON
Question
Chapter 6, Problem 6.1LO
To determine

The difference between average and marginal tax rates

Concept introduction:

Tax rate: It is the percentage of taxable income that an income earner pays to the government as tax.

Progressive taxation system: It is a taxation system in which tax rate rises with increase in taxable income.

Regressive taxation system: It is a taxation system in which tax rate falls with increase in taxable income.

Proportional taxation system: It is a taxation system in which the tax rate is a fixed percentage of taxable income.

Expert Solution & Answer
Check Mark

Explanation of Solution

The average tax rate is the fraction of total taxable income that an individual or a company pays as tax.

ATR denotes average tax rate, T denotes total tax paid and Y denotes total taxable income.

The average tax rate is calculated as follows:

    Economics Today: The Micro View (19th Edition) (Pearson Series in Economics), Chapter 6, Problem 6.1LO , additional homework tip  1

The marginal tax rate is the tax rate applicable to the additional dollar of taxable income earned by an individual or firm.

MTR denotes marginal tax rate, △T denotes additional tax paid and △Y denotes additional taxable income.

The marginal tax rate is calculated as follows:

    Economics Today: The Micro View (19th Edition) (Pearson Series in Economics), Chapter 6, Problem 6.1LO , additional homework tip  2

Taxable incomes are divided into slabs in both progressive and regressive taxation systems. In a progressive taxation system, lower slabs attract lower marginal tax rates and higher slabs, higher marginal tax rates. Therefore, as taxable incomes of individuals and firms rise, the marginal tax rate also rises. Thus, in such a system, the marginal tax rate is always greater than the average tax rate. In a regressive taxation system, lower slabs attract higher marginal tax rates and higher slabs, lower marginal tax rates. Therefore, as taxable incomes of individuals and firms rise, the marginal tax rate falls. Thus, in such a system, the marginal tax rate is always lower than the average tax rate.

In a proportional taxation system, there are no income slabs. The marginal tax rate remains the same, irrespective of the level of taxable incomes of individuals and firms. Therefore, the marginal tax rate is a fixed percentage of the total taxable income. Thus, in such a system, the marginal tax rate is always equal to the average tax rate.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Recommended textbooks for you
  • ENGR.ECONOMIC ANALYSIS
    Economics
    ISBN:9780190931919
    Author:NEWNAN
    Publisher:Oxford University Press
    Principles of Economics (12th Edition)
    Economics
    ISBN:9780134078779
    Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
    Publisher:PEARSON
    Engineering Economy (17th Edition)
    Economics
    ISBN:9780134870069
    Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
    Publisher:PEARSON
  • Principles of Economics (MindTap Course List)
    Economics
    ISBN:9781305585126
    Author:N. Gregory Mankiw
    Publisher:Cengage Learning
    Managerial Economics: A Problem Solving Approach
    Economics
    ISBN:9781337106665
    Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
    Publisher:Cengage Learning
    Managerial Economics & Business Strategy (Mcgraw-...
    Economics
    ISBN:9781259290619
    Author:Michael Baye, Jeff Prince
    Publisher:McGraw-Hill Education
  • ENGR.ECONOMIC ANALYSIS
    Economics
    ISBN:9780190931919
    Author:NEWNAN
    Publisher:Oxford University Press
    Principles of Economics (12th Edition)
    Economics
    ISBN:9780134078779
    Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
    Publisher:PEARSON
    Engineering Economy (17th Edition)
    Economics
    ISBN:9780134870069
    Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
    Publisher:PEARSON
    Principles of Economics (MindTap Course List)
    Economics
    ISBN:9781305585126
    Author:N. Gregory Mankiw
    Publisher:Cengage Learning
    Managerial Economics: A Problem Solving Approach
    Economics
    ISBN:9781337106665
    Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
    Publisher:Cengage Learning
    Managerial Economics & Business Strategy (Mcgraw-...
    Economics
    ISBN:9781259290619
    Author:Michael Baye, Jeff Prince
    Publisher:McGraw-Hill Education