Question

Income quintile: 2010 Income: Average Income: Share of Total Income (%):

Highest fifth Above $106,000 $185,000 51.0

Second fifth $65,000-106,000 $84,000 23.0

Third fifth $40,000-65,000 $52,000 14.4

Fourth fifth $21,000-40,000 $31,000 8.4

Lowest fifth $0-21,000 $12,000 3.2

Using this chart, please find the implied tax (i.e., tax/average income) on the highest quintile. Please round to one decimal.

Answer 1

STEP 1

Calculate Average of average income for each income quintile -

Average = ($185,000 + $84,000 + $52,000 + $31,000 + $12,000)/5

Average = $364,000/5 = $72,800

The average of average income for each income quintile is $72,800.

STEP 2

Calculate amount of implied tax on highest quintile -

Implied tax = Average income of highest quintile - Average of average income for each income quintile

Implied tax = $185,000 - $72,800 = $112,200

STEP 3

Calculate the implied tax rate -

Implied tax rate = (Implied tax/Average income) * 100

Implied tax rate = ($112,200/$185,000) * 100 = 60.6%

Thus,

The implied tax rate on the highest quintile is 60.6%.