and $34,500 (which is taxed at 15%), and the income above $34,500 (which is taxed at 25%). Of the
first $34,500 she earns, Yvette owes the following amount in taxes (rounded to the nearest whole
number):
Therefore, Yvette would owe
plus 25% of the amount over $34,500:
Yvette then calculates that her average tax rate is
15%
, based on the annual income level and the amount of taxes she owes for 2011.
Points:
1 / 1
Close Explanation
Explanation:
The average tax rate is defined as the total tax paid divided by the amount of taxable income.
Therefore, Yvette's average tax rate is as follows:
Converting 0.1531 to a percentage and rounding to the nearest whole number results in 15%.
Notice that Yvette is in the 25% marginal tax bracket, yet her average tax rate is less, at 15%. This
difference occurs because only income above $34,500 is taxed at 25%. Income below $34,500 is taxed
at less than 25%.

After figuring out what she owes in taxes in 2011, Yvette decides to ask an accountant for tax advice.
The accountant claims that he has found a legal way to shelter $4,000 of taxable income from the
federal government.
The maximum amount that Yvette is willing to pay to learn this strategy and reduce her taxable
income by $4,000 is
$1,000
. (Hint: Sheltering some income means finding a legal way to avoid being charged income tax on that
income. For example, someone who has $50,000 in income and shelters $10,000 pays income tax on
only $40,000.)
Points:
1 / 1
Close Explanation
Explanation:
Since Yvette's marginal tax rate is 25%, reducing her taxable income by $4,000 will save Yvette
$1,000 in annual taxes. Therefore, Yvette should be willing to pay up to $1,000 to shelter $4,000 of
income from the federal government.

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- Spring '14
- Microeconomics, Progressive Tax, Taxation in the United States, Yvette