10. In Swedagon nation, the tax system is as follows: income from $0 to $20,000, tax...

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10. In Swedagon nation, the tax system is as follows: income from $0 to $20,000, tax...

10. In Swedagon nation, the tax system is as follows: income from $0 to $20,000, tax rate is 25%; and income above $20,000 is taxed at 50%. What effective percentage of income does an individual pay in taxes under this tax system if that individual’s pre-tax income is $40,000?

25%

12.5%

125%

37.5%

business economics

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Answer 1

Answer #1

Tax System -

1. Income from $0 to $20,000 - Tax rate is 25%

2. Income above $20,000 - Tax rate is 50%.

Pre tax Income = $40,000

Calculate the Tax -

Tax = [$20,000 * 0.25] + [$20,000 * 0.50] = $5,000 + $10,000 = $15,000

The Tax owed by the person is $15,000.

Calculate the effective percentage of income paid as tax -

Effective percentage = Tax paid/Income = $15,000/$40,000 = 0.375 or 37.5%

Thus,

The effective percentage of income paid in tax is 37.5%.

Hence, the correct answer is the option (d) [37.5%].

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Answer 2

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