Question

Marginal tax rates. Using the tax rate schedule given in Table 1.2, perform the following:
a.	Find the marginal tax rate for the following levels of sole proprietorship earnings before taxes: $15,000; $60,000; $90,000; $150,000; $250,000; $450,000; and $1 million.
b.	Plot the marginal tax rates (measured on the y-axis) against the pretax incomelevels (measured on the x-axis). Explain the relationship between these variables.
	Table 1.2	2018 Tax Rate Schedule for Single Taxpayer
					Tax calculation
					Base tax	+	(Marginal rate × amount over bracket lower limit)
	Taxable income brackets
		$0	to	$9,525	$0	+	10%	× amount over	$0
		$9,525	to	$38,700	$953	+	12%	× amount over	$9,525
		$38,700	to	$82,500	$4,454	+	22%	× amount over	$38,700
		$82,500	to	$157,500	$14,090	+	24%	× amount over	$82,500
		$157,500	to	$200,000	$32,090	+	32%	× amount over	$157,500
		$200,000	to	$500,000	$45,690	+	35%	× amount over	$200,000
	Over	$500,000			$150,690	+	37%	× amount over	$500,000

Answer 1

Please refer to the income tax rate slabs given to us.

We will have to refer to this table to get the marginal tax rate corresponding to the taxable income.

Part (a)

Taxable income = $ 15,000

Since 15,000 is in the second slab i.e. pre tax income is less than $ 38,700 marginal tax rate = 12%

Taxable income = $ 60,000

Since 60,000 is in the third slab i.e. pre tax income is less than $ 82,500 marginal tax rate = 22%

Taxable income = $ 90,000

Since 90,000 is in the fourth slab i.e. pre tax income is less than $ 157,500 marginal tax rate = 24%

Taxable income = $ 150,000

Since 150,000 is in the fourth slab i.e. pre tax income is less than $ 157,500 marginal tax rate = 24%

Taxable income = $ 250,000

Since 250,000 is in the sixth slab i.e. pre tax income is less than $ 500,000 marginal tax rate = 35%

Taxable income = $ 450,000

Since 450,000 is in the sixth slab i.e. pre tax income is less than $ 500,000 marginal tax rate = 35%

Taxable income = $ 1,000,000

Since 1,000,000 is in the final slab i.e. pre tax income is greater than $ 500,000 marginal tax rate = 37%

The summary is shown in table below:

Pre tax income	Marginal tax rate
15,000	12%
60,000	22%
90,000	24%
150,000	24%
250,000	35%
450,000	35%
1,000,000	37%

Part (b)

Please see the graph below

Relationship between the variables:

Marginal tax rate (%) vs Pre tax income ($) 40% 35% 30% 25% 20% 15% 10% 5% 0% 35% 35% 24% 24% 90,000 150.000 250.000 450.000 1,00000 _ 15,000 60,000 250,000 450,0001,000,000 Pre tax income IS)

1. Marginal tax rate increases as level of pre tax income increases

2. The rate of increase (slope of the curve) is high initially and decreases subsequently.

3. Marginal tax rate becomes constant at 37% once pre tax income exceeds $ 500,000