Taxable Income $0-$9,075 $9,076-$36,900 $36,901-$89,350 $89,351-$186,350 $186,35

Question

Taxable Income $0-$9,075 $9,076-$36,900 $36,901-$89,350 $89,351-$186,350 $186,351-$405,100 $405,101-$406,750 Over $406,750 Tax rate 10% 15% 25% 28% 33% 35% 39.6% 10% 15% 25% 28% 33% 35% 39.6% $0 $9,075 $36,900 $89,350 $186,350 $405,101 $406,750 Taxable income The Flannigan household's annual income is $296000. Based on the U.S. federal tax rates below, what is the average tax rate for the Flannigan household? (Assume zero tax deductions for solving this problem.) Choose one ® A, 33% B. 22.22% C. 45% D. 27.55%

Explanation / Answer

A Progressive tax rate is one that increases with income of the consumer. The proportional tax rate on the other hand remains the same irrespective of the income of the consumer. Thus, in progressive tax rate the average tax rate paid is different than the tax bracket the person is in. To compute the average tax rate under the progressive tax system, the tax paid by the consumer is to be calculated first.

Like in this case, the househld is in 33% tax bracket. But it is taxed at 10% for first $9075, at 15% for next ($36900-$9075)=$27825 and so on. The tax amount for each bracket up to 33% is given in the table below:

Then total tax the household pays is $81538.25. This is about 27.55% of the total household income.

Therefore, average tax rate is 27.55%.

The correct option is: (D)

9075 9075 0.1 907.5 36900 27825 0.15 4173.75 89350 52450 0.25 13112.5 186350 97000 0.28 27160 296000 109650 0.33 36184.5 Total 296000 Total Tax 81538.25 Avg. Tax Rate 0.275467

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