The Average Tax Rate and the Marginal Tax Rate

If someone asked you what your tax rate was, would you have a ready answer? So the answer to the question "What's your tax rate?" is "Which tax rate are you referring to? My average tax rate or my marginal tax rate?"

We all pay tax at two different rates: the average rate and the marginal rate. The average rate is the overall rate you pay on your entire income, while the marginal rate is the rate you pay on your last few hundreds (or thousands) of dollars earned. Your marginal rate is often referred to as your tax bracket. In nearly all cases, I'm talking about the average and marginal rates that you're paying in personal income tax, but I'll apply the average tax rate to the Social Security tax as well.

The Average Tax RateHow do you answer the question "Tell me your average tax rate"?

Let's try a simple problem. The average tax rate is calculated by dividing taxes paid by taxable income:

Taxes paid

Average tax rate (ATR) = -------------------

Taxable income

Suppose a person paid $3,000 on a taxable income of $20,000. How much is the average tax rate? Do your calculations right here:

Taxes paid $3,000

Average tax rate = ------------------ = -------------=15=15%

Taxable income $20,000

The Marginal Tax RateThe average tax rate is the overall rate you pay on your entire income, while the marginal tax rate is the rate you pay on the last few hundred dollars you earned. Suppose you made $100 in overtime and the government took $70. Would you work overtime? Chances are you wouldn't, and that supposition forms a cornerstone of supply-side economics. The supply-siders' basic belief is that our high marginal tax rates rob people of the incentive to work as hard and as long as they would with a lower tax burden.

The marginal tax rate is calculated by dividing additional taxes paid by additional taxable income:

Additional taxes paid

Marginal tax rate (MTR) =--------------------------------------

Additional taxable income

Suppose you had to pay an additional $420 on an additional taxable income of $1,000. How much is the marginal tax rate?

Additional taxes paid $420 42

Marginal tax rate (MTR) = ---------------------------- = ----------- = ------ =4,2=42%

Additional taxable $1,000 100

income

20.2.Find in the text the English equivalents of the following words and word-combinations:

1. ставка податку

2. існувати, жити

3. тяжкий, обтяжливий, важкий

4. середній

5. граничний

6. відсилати, відносити до

7. загальний

8. цілковитий, цілий, увесь

9. розряд оподаткування

10. ставитися до, використовувати, застосовувати

11. підраховувати, розраховувати

12. прибуток, обкладений податком

13. понаднормовий

14. наріжний камінь

15. позбавляти

16. стимул

17. податковий тягар

18. додатковий

20.3. Are these statements true or false? Correct the false ones.

a) The average tax rate is calculated by dividing taxes paid by taxable income.

b) Both juridical and natural persons pay taxes at two different rates.

c) The marginal tax rate is calculated by dividing assessed taxes paid by additional taxable income.

d) The American tax system is really burdensome.

20.4. Solve the problems:

a) Suppose you pay $ 12,000 on a taxable income of $ 50,000. How much is your average tax rate?

b) Suppose your taxable income rose from $ 20,000 to $ 22,000 and the taxes you paid rose from $ 4.500, to $ 5.200. How much is your marginal tax rate?

To solve these problems: (1) write the formulae, (2) substitute numbers into the formulae and (3) solve.

21.1 Read text 25. Define and put down the key words of each paragraph of the text.