ACCT M50 PRINCIPLES OF INCOME TAXATION PRACTICE EXAM | FREE SOLVED ANSWERS
Which of the following statements is false with respect to marginal and average tax rates?
Which of the following statements is false with respect to marginal and average tax rates?
Multiple Choice
- a. For most taxpayers, the average rate is larger than the marginal rate.
- b. For taxable income greater than the lowest tax bracket, the average rate is always greater than the lowest marginal rate and less than the highest marginal rate
- c. The average rate is the percentage of tax paid on the entire amount of taxable income.
- d. The marginal rate is the proportion of tax paid on the next dollar of taxable income
Correct Answer (False Statement):
For most taxpayers, the average rate is larger than the marginal rate.
“For most taxpayers, the average rate is larger than the marginal rate.”
False.
- In a progressive tax system, the marginal tax rate (rate on the last dollar earned) is typically higher than the average tax rate (total tax ÷ total income).
- Example: If your taxable income is $60,000, your marginal rate might be 22%, but your average rate could be only 15%.
“For taxable income greater than the lowest tax bracket, the average rate is always greater than the lowest marginal rate and less than the highest marginal rate.”
True.
- The average falls between the lowest and highest marginal brackets applicable to that taxpayer.
“The average rate is the percentage of tax paid on the entire amount of taxable income.”
True.
- Formula: Average Tax Rate = Total Tax Liability ÷ Taxable Income.
“The marginal rate is the proportion of tax paid on the next dollar of taxable income.”
True.
- This is the definition of the marginal tax rate.
ACCT M50 PRINCIPLES OF INCOME TAXATION PRACTICE EXAM FREE SOLVED ANSWERS