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You are expected to calculate (AO4) the amount of indirect tax paid given the tax rate, calculate (AO4) the amount of tax paid and the average tax rate given tax brackets, and explain/analyze (AO2) marginal and average tax rates (HL)
This page is for Higher Level students only.
Calculating Indirect Tax paid given the Tax Rate (AO4)
Calculating Indirect Tax paid given the Tax Rate (AO4)
A question they might ask you on exams is to find the amount of indirect tax a person/company paid when buying a good/service. Here is an example that teaches you how to do it:
QUESTION: Barry spent $30,000 on a new car. The sales tax on cars in his country is 21%. How much did the car cost before sales taxes?
In order to solve this question, we use this formula:
We then plug our values in (Indirect Tax = 0.21, Total Spending = 30,000):
Original Cost = 30,000/1.21
= $24793.38 is the cost of the car before sales taxes.
Calculating Total and Average Tax Rates from Data (AO4)
Calculating Total and Average Tax Rates from Data (AO4)
On exams, you may see a table like this, where you will be asked to find the amount of tax paid by Person A and Person B. ->
QUESTION: "Person A earns $35,000 a year, and Person B earns $70,000 a year. Given this diagram, how much did each person pay in taxes, and what are their average tax rates?"
We see one column labelled Marginal Tax Rate. This refers to the amount of tax paid on each additional dollar you make.
And we are trying to find their Average Tax Rate. This refers to the average tax percentage you pay on the whole sum.
Now, let's calculate! Let's do Person A first.
On their first $10,000, they pay 8%. 10,000 x 0.08 = 800
On their next $10,000, they pay 20%. 10,000 x 0.20 = 2000
On their last $15,000, they pay 30%. 15,000 x 0.30 = 4500
So in total, they pay 800 + 2000 + 4500 = $7,300 in taxes. This is the Total Tax.
The exam might also ask you to find the "average tax rate". You do this by dividing the tax paid by the initial income.
They paid $7,300 in taxes on a $35,000 income.
7300 / 35000 = 0.2086 = 20.86% is their Average Tax Rate.
Now, for repetition's sake, let's to Person B.
On their first $10,000, they pay 8%. 10,000 x 0.08 = 800
On their next $10,000, they pay 20%. 10,000 x 0.20 = 2000
On their next $20,000, they pay 30%. 20,000 x 0.3 = 6000
On their last $30,000, they pay 45%. 30,000 x 0.45 = 13500
So in total, they pay 800 + 2000 + 6000 + 13500 = $22,300 in taxes.
So 22300 / 70000 = 0.3186 = 31.86% is their Average Tax Rate
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