ON TAXABLE INCOME THE TAX RATE IS ..
UP TO $27,050 15.0%
FROM $27,050 TO 65,550 27.5
FROM $65,550 TO 136,750 30.5
FROM $136,750 TO 297,350 35.5
OVER $297,350 39.1
Suppose you are a typical person in the U.S. economy. You pay 4 percent of your income in state income tax and 15.3 percent of your labor earnings in federal payroll taxes (employer and employee shares combined).
You also pay federal income taxes as in Table 3. How much tax of each type do you pay if you earn $20,000 a year?
Taking all taxes into account, what are your average and marginal tax rates?
What happens to your tax bill and to your average and marginal tax rates if your income rises to $40,000?
Three Tax Systems
Proportional Tax Regressive Tax Progressive Tax
INCOME AMOUNT OF TAX PERCENT OF INCOME AMOUNT OF TAX PERCENT OF INCOME AMOUNT OF TAX PERCENT OF INCOME
50,000 12,500 25% 15,000 30% 10,000 20%
100,000 25,000 25 25,000 25 25,000 25
200,000 50,000 25 40,000 20 60,000 30
Any income tax schedule embodies two types of tax rates - average tax rates and marginal tax rates.
a. The average tax rate is defined as total taxes paid divided by income. For the proportional tax system presented in Table 7, what are the average tax rates for people earning $50,000, $100,000, and $200,000?
What are the corresponding average tax rates in the regressive tax system?
for the progressive tax system?
b. The marginal tax rate is defined as the extra taxes paid on additional income divided by the increase in income. Calculate the marginal tax rate for the proportional tax system as income rises from $50,000 to $100,000.
Calculate the marginal tax rate as income rises from $100,000 to $200,000.
Calculate the corresponding marginal tax rates for the regressive and progressive tax systems.
c. Describe the relationship between average tax rate and marginal tax rates for each of these three systems. In general, which rate is relevant for someone deciding whether to accept a job that pays slightly more than her current job?
Which rate is relevant for judging the vertical equity of a tax system?