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.

Question

Quizplus · Accepted Answer

Lily's income places her in the highest tax bracket for a portion of her income, which increases her average tax rate compared to Marshall, who has a portion of his income taxed at lower rates. Marshall's marginal tax rate (the rate on the last dollar earned) is the same as Lily's if we only consider the given tax brackets, but Lily's average tax rate (total tax paid divided by total income) is higher because a larger portion of her income is subject to the highest tax rate.

Suppose That the Government Taxes Income in the Following Fashion