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What is average and marginal tax rate?

What is the Difference Between Marginal Tax Rate and Average Tax Rate?

  • Assume that apples are priced at $1 each, and each person can buy at most 5,000 apples. The government has devised the follow tax plans: PLAN A: Consumption up to 1,000 apples is taxed at 5%. Consumption higher than 1,000 apples is taxed at 20% PLAN B: Consumption up to 2,000 apples is taxed at 30%. Consumption higher than 2,000 apples is taxed at 10%. Under Plan A, what is the Marginal and Average Tax Rate with consumption level 500 apples, 1,500 apples, and 2,500 apples? Do the same for Plan B. Sorry to bother you, but we are in a study group and none of us can figure out the difference between Marginal and Average Tax Rate in this situation. Could you please show the difference? Thank You.

  • Answer:

    Marginal is the tax rate on the next apple. Average is the tax rate on all apples so far.

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