Question

12. If the government follows an income tax system in which income up to $25,000 is taxed 4%, income greater than $25,000 and less than or equal to $50,000 is taxed at a rate of 10% and income over $50,000 is taxed at a rate of 25%; then a family earning $60,000 will pay an average tax rate of (assumed there is no deductions or exemptions):

  

12.5%  

15%   

25%  

10%

Answer 1

Tax system -

Income up to $25,000 - Tax rate is 4% or 0.04

Income between $25,000 and $50,000 - Tax rate is 10% or 0.10

Income above $50,000 - Tax rate is 25% or 0.25

Income of the Family = $60,000

Calculate the Tax -

Tax = ($25,000 * 0.04) + ($25,000 * 0.10) + ($10,000 * 0.25)

Tax = $1,000 + $2,500 + $2,500 = $6,000

The tax to be paid by family would be $6,000.

Calculate the average tax rate -

Average tax rate = Tax paid/Income = $6,000/$60,000 = 10%

The average tax rate is 10%.

Hence, the correct answer is the option (d) [10%].