The Design of the Tax System 3031
99. Refer to Scenario 12-4. The taxpayer faces
a. an average tax rate of 22.5 percent when her income is $30,000.
b. an average tax rate of 22.0 percent when her income is $50,000.
c. a marginal tax rate of 10 percent when her income rises from $40,000 to $40,001.
d. a marginal tax rate of 50 percent when her income rises from $60,000 to $60,001.
100. Refer to Scenario 12-4. At what level of income would the taxpayer’s marginal tax rate be 30
percent and her average tax rate be 25 percent?
a. $42,000
b. $57,000
c. $60,000
d. $80,000
101. If your income is $40,000 and your income tax liability is $5,000, your marginal tax rate is
a. 8 percent.
b. 12.5 percent.
c. 20 percent.
d. unknown. We do not have enough information to answer this question.
3032 The Design of the Tax System
102. The deadweight loss of an income tax is determined by the
a. amount of total tax revenue to the government.
b. marginal tax rate.
c. average tax rate.
d. ability-to–pay principle.
103. Nancy paid a tax of $0.50 on the last dollar she earned in 1999. Nancy’s marginal tax rate in
1999 was
a. more than 50 percent.
b. exactly 50 percent.
c. higher than her average tax rate.
d. lower than her average tax rate.
The Design of the Tax System 3033
104. If we want to gauge how much the income tax system distorts incentives, we should use the
a. average tax rate.
b. ability-to–pay principle.
c. total tax revenue collected.
d. marginal tax rate.
105. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20
percent on all income above $40,000. What are the tax liability and the marginal tax rate for a
person whose income is $50,000?
a. 12 percent and 20 percent, respectively
b. 12 percent and $50,000, respectively
c. $6,000 and 12 percent, respectively
d. $6,000 and 20 percent, respectively
3034 The Design of the Tax System
106. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20
percent on all income above $40,000. What are the tax liability and the marginal tax rate for a
person whose income is $30,000?
a. both are 10 percent
b. 10 percent and $2,000, respectively
c. $3,000 and 10 percent, respectively
d. $3,000 and 20 percent, respectively
107. Tim earns income of $60,000 per year and pays $21,000 per year in taxes. Tim paid 20 percent
in taxes on the first $30,000 he earned. What was the marginal tax rate on the second $30,000
he earned?
a. 20 percent
b. 30 percent
c. 50 percent
d. 70 percent
The Design of the Tax System 3035
108. James earns income of $90,000 per year. His average tax rate is 40percent. James paid $5,500
in taxes on the first $40,000 he earned. What was the marginal tax rate on the rest of his
income?
a. 6.1 percent
b. 44 percent
c. 55 percent
d. 61 percent
109. Sue earns income of $80,000 per year. Her average tax rate is 30 percent. Sue paid 20 percent
in taxes on the first $30,000 she earned. What was the marginal tax rate on the rest of her
income?
a. 20 percent
b. 24 percent
c. 30 percent
d. 36 percent
3036 The Design of the Tax System
110. Sue earns income of $80,000 per year. Her average tax rate is 40 percent. Sue paid $4,500 in
taxes on the first $30,000 she earned. What was the marginal tax rate on the rest of her income?
a. 15 percent
b. 32 percent
c. 40 percent
d. 55 percent
111. Sue earns income of $80,000 per year. Her average tax rate is 50 percent. Sue paid $5,000 in
taxes on the first $30,000 she earned. What was the marginal tax rate on the first $30,000 she
earned, and what was the marginal tax rate on the remaining $50,000?
a. 6.25 percent and 50.00 percent, respectively
b. 10.00 percent and 70.00 percent, respectively
c. 16.67 percent and 60.00 percent, respectively
d. 16.67 percent and 70.00 percent, respectively
The Design of the Tax System 3037
112. Suppose the government imposes a tax of 20 percent on the first $50,000 of income and 30
percent on all income above $50,000. What is the marginal tax rate when income is $60,000?
a. 10 percent
b. 20 percent
c. 30 percent
d. 50 percent
113. If your income is $50,000, your income tax liability is $10,000, and you paid $0.25 in taxes on the
last dollar you earned, your
a. marginal tax rate is 20 percent.
b. average tax rate is 5 percent.
c. marginal tax rate is 25 percent.
d. average tax rate is 25 percent.
3038 The Design of the Tax System
114. High marginal income tax rates
a. distort incentives to work.
b. are used to encourage saving behavior.
c. will invariably lead to lower average tax rates.
d. are not associated with deadweight losses.
115. If we want to gauge the sacrifice made by a taxpayer, we should use the
a. average tax rate.
b. marginal tax rate.
c. lump–sum tax rate.
d. sales tax rate.
116. Total taxes paid divided by total income is called the
a. lump–sum tax liability.
b. marginal tax rate.
c. average tax rate.
d. average consumption tax liability.
The Design of the Tax System 3039
117. A person‘s tax obligation divided by her income is called her
a. marginal social tax rate.
b. marginal private tax rate.
c. marginal tax rate.
d. average tax rate.
118. A person’s average tax rate equals her
a. tax obligation divided by her marginal tax rate.
b. increase in taxes if her income were to rise by $1.
c. tax obligation divided by her income.
d. increase in taxes if her marginal tax rate were to rise 1percent.
119. If your income is $40,000 and your income tax liability is $5,000, your
a. marginal tax rate is 8 percent.
b. average tax rate is 8 percent.
c. marginal tax rate is 12.5 percent.
d. average tax rate is 12.5 percent.
3040 The Design of the Tax System
120. The average tax rate measures the
a. fraction of spending paid in taxes.
b. fraction of income paid in taxes.
c. incremental rate of tax on income.
d. average deadweight loss from all taxes.
121. Suppose the government imposes a tax of 10 percent on the first $40,000 of income and 20
percent on all income above $40,000. What is the average tax rate when income is $50,000?
a. 20 percent
b. 15 percent
c. 12 percent
d. 10 percent
The Design of the Tax System 3041
122. Suppose the government imposes a tax of 20 percent on the first $50,000 of income and 30
percent on all income above $50,000. What is the average tax rate when income is $60,000?
a. 21.7 percent
b. 25.0 percent
c. 46.7 percent
d. 50.0 percent
123. Bert faces a progressive tax structure that has the following marginal tax rates: 0 percent on the
first $10,000, 10 percent on the next $10,000, 15 percent on the next $10,000, 25 percent on the
next $10,000, and 50 percent on all additional income. If Bert earns $75,000, what is his average
tax rate?
a. 20 percent
b. 25 percent
c. 30 percent
d. 36.67 percent
3042 The Design of the Tax System
124. Maurice faces a progressive federal income tax structure that has the following marginal tax
rates: 0 percent on the first $10,000, 10 percent on the next $10,000, 15 percent on the next
$10,000, 25 percent on the next $10,000, and 50 percent on all additional income. In addition, he
must pay 5 percent of his income in state income tax and 15.3 percent of his labor income in
federal payroll taxes. Maurice earns $60,000 per year in salary and another $10,000 per year in
non-labor income. What is his average tax rate?
a. 17.19 percent
b. 46.69 percent
c. 48.87 percent
d. 56.01 percent
125. Which of the following statements is correct?
a. The average tax rate gauges the sacrifice made by a taxpayer, whereas the marginal tax rate
gauges the distortion of taxes on consumer decisions.
b. The marginal tax rate gauges the sacrifice made by a taxpayer, whereas the average tax rate
gauges the distortion of taxes on consumer decisions.
c. The average tax rate measures how much the tax system discourages people from working.
d. The marginal tax rate measures total taxes paid divided by total income.
The Design of the Tax System 3043
126. Suppose that the government taxes income in the following fashion: 30 percent of the first
$20,000, 50 percent of the next $30,000, and 60 percent of all income over $50,000. Ted earns
$40,000, and Robin earns $60,000. Which of the following statements is correct?
a. Ted’s marginal tax rate is 60 percent, and his average tax rate is 50 percent.
b. Ted‘s marginal tax rate is 50 percent, and his average tax rate is 40 percent.
c. Robin‘s marginal tax rate is 50 percent, and her average tax rate is 45 percent.
d. Robin’s marginal tax rate is 60 percent, and her average tax rate is 40 percent.
127. Suppose that the government taxes income in the following fashion: 20 percent of the first
$50,000, 40 percent of the next $50,000, and 60 percent of all income over $100,000. Marshall
earns $200,000, and Lily earns $600,000. Which of the following statements is correct?
a. Marshall’s marginal tax rate is higher than Lily’s marginal tax rate.
b. Marshall’s average tax rate is higher than his marginal tax rate.
c. Lily’s average tax rate is higher than her marginal tax rate.
d. Lily’s average tax rate is higher than Marshall’s average tax rate.
3044 The Design of the Tax System
128. Pat calculates that for every extra dollar she earns, she owes the government 33 cents. Her
total income now is $35,000, on which she pays taxes of $7,000. Determine her average tax rate
and her marginal tax rate.
a. Her average tax rate is 33 percent and her marginal tax rate is 20 percent.
b. Her average tax rate is 20 percent and her marginal tax rate is 33 percent.
c. Her average tax rate is 20 percent and her marginal tax rate is 20 percent.
d. Her average tax rate is 33 percent and her marginal tax rate is 33 percent.
129. Pat calculates that for every extra dollar she earns, she owes the government 40 cents. Her total
income now is $44,000, on which she pays taxes of $11,000. Determine her average tax rate
and her marginal tax rate.
a. Her average tax rate is 40 percent and her marginal tax rate is 25 percent.
b. Her average tax rate is 40 percent and her marginal tax rate is 40 percent.
c. Her average tax rate is 25 percent and her marginal tax rate is 25 percent.
d. Her average tax rate is 25 percent and her marginal tax rate is 40 percent.
The Design of the Tax System 3045
130. Suppose the government taxes 30 percent of the first $70,000 and 50 percent of all income above
$70,000. For a person earning $100,000, the marginal tax rate is
a. 30 percent, and the average tax rate is 50 percent.
b. 30 percent, and the average tax rate is 36 percent.
c. 50 percent, and the average tax rate is 40 percent.
d. 50 percent, and the average tax rate is 36 percent.
131. The income tax requires that taxpayers pay 10percent on the first $40,000 of income and 20
percent on all income over $40,000. Karen paid $6,000 in taxes. What were her marginal and
average tax rates?
a. 20 percent and 12 percent, respectively
b. 20 percent and 15 percent, respectively
c. 10 percent and 12 percent respectively
d. 10 percent and 15 percent respectively
3046 The Design of the Tax System
132. The income tax requires that taxpayers pay 10 percent on the first $50,000 of income and 20
percent on all income over $50,000. Andy paid $9,000 in taxes. What were his marginal and
average tax rates?
a. 20 percent and 13 percent, respectively
b. 20 percent and 15 percent, respectively
c. 10 percent and 13 percent respectively
d. 10 percent and 15 percent respectively
133. The income tax requires that taxpayers pay 10percent on the first $40,000 of income and 20
percent on all income over $40,000. Karen paid $6,000 in taxes. What were her marginal and
average tax rates?
a. 20 percent and 12 percent, respectively
b. 20 percent and 15 percent, respectively
c. 10 percent and 12 percent respectively
d. 10 percent and 15 percent respectively
The Design of the Tax System 3047
134. The income tax requires that taxpayers pay 10percent on the first $40,000 of income and 20
percent on all income over $40,000. Emily paid $9,000 in taxes. What were her marginal and
average tax rates?
a. 20 percent and 13.8 percent, respectively
b. 20 percent and 15 percent, respectively
c. 10 percent and 13.8 percent respectively
d. 10 percent and 15 percent respectively
135. Suppose the government taxes 30 percent of the first $70,000 and 50 percent of all income above
$70,000. For a person earning $200,000, the marginal tax rate is
a. 30 percent, and the average tax rate is 50 percent.
b. 30 percent, and the average tax rate is 43 percent.
c. 50 percent, and the average tax rate is 40 percent.
d. 50 percent, and the average tax rate is 43 percent.
3048 The Design of the Tax System
136. Suppose the government taxes 25 percent of the first $60,000 of income and 40 percent of all
income above
$60,000. For a person earning $200,000, the marginal tax rate is
a. 25 percent, and the average tax rate is 32.5 percent.
b. 25 percent, and the average tax rate is 36 percent.
c. 40 percent, and the average tax rate is 32.5 percent.
d. 40 percent, and the average tax rate is 36 percent.
137. Suppose the government taxes 10 percent of the first $40,000 of income and 20 percent of all
income over $40,000. Shahina paid $10,000 in taxes. What were her marginal and average tax
rates?
a. 20 percent and 15 percent, respectively
b. 20 percent and 14 percent, respectively
c. 10 percent and 15 percent respectively
d. 10 percent and 14 percent respectively
The Design of the Tax System 3049
138. Costas faces a progressive federal income tax structure that has the following marginal tax
rates: 0 percent on the first $10,000, 10 percent on the next $10,000, 15 percent on the next
$10,000, 25 percent on the next $10,000, and 50 percent on all additional income. In addition, he
must pay 5 percent of his income in state income tax and 15.3 percent of his labor income in
federal payroll taxes. Costas earns $70,000 per year in salary and another $20,000 per year in
non–labor income. What is his average tax rate, and what is his marginal tax rate on his salary?
a. His average tax rate is 17.19 percent, and the marginal tax rate on his salary is 55 percent.
b. His average tax rate is 50.23 percent, and the marginal tax rate on his salary is 70.3 percent.
c. His average tax rate is 53.63 percent, and the marginal tax rate on his salary is 70.3 percent.
d. His average tax rate is 55.79 percent, and the marginal tax rate on his salary is 70.3 percent.
Table 12-3
Income
Tax rate
$0 to $40,000
20%
Over $40,000
50%
139. Refer to Table 12-3. What is the marginal tax rate for a person who makes $35,000?
a. 20%
b. 30%
c. 40%
d. 50%
3050 The Design of the Tax System
140. Refer to Table 12-3. What is the marginal tax rate for a person who makes $60,000?
a. 20%
b. 30%
c. 40%
d. 50%
141. Refer to Table 12-3. What is the average tax rate for a person who makes $60,000?
a. 20%
b. 30%
c. 40%
d. 50%