Question

Marginal and average tax rates Using the tax rate schedule given here i, perform the following: a. Calculate the tax liability, after-tax earnings, and average tax rates for the following levels of partnership earnings before taxes: $14.500; $80,400: $303.000: $496,000; $1.1 million: $1.6 million; and $1.9 million. b. Plot the average tax rates (measured on the y axis) against the pretax income levels (measured on the x axis). What generalization can be made concerning the relationship between these variables?

Answer 1

Calculation of tax liability
Earnings before tax( in $)	14500	80400	303000	496000	1100000	1600000	1900000		Tax slabs	Tax amount	Tax rate(%)
Tax Liability	1550	13627.5	81739.5	149289.5	372689.5	557689.5	668689.5		9525	952.5	10
									29175	3501	12
After tax earnings	12951	66773	221261	346711	727311	1042311	1231311		43800	9636	22
									75000	18000	24
Average tax rates	11	14.66667	22.5	22.5	24.57143	24.57143	24.57143		42500	13600	32
									300000	105000	35
Average tax rates based on the Earnings before tax	0.106862	0.169496	0.269767	0.300987	0.338809	0.348556	0.351942		More than 500000		37
The relationship between these variables are one is calculated according to the tax rates applied and other one is calculated based on the tax
liability and the Income. The variance come because of the marginal tax rate applied for the balance income in that slab rate which is differ from
one level to another.