Question

Marginal tax rates  

Partner A, a single taxpayer, is one of two partners in a small business. As such, she receives pass-through income that is taxed at her personal tax rates. After all adjustments and deductions have been made, including the 20% qualified business income deduction, she is preparing to calculate her taxes owed for the year. Using the tax rate schedule given here, perform the following:

a. Find the marginal tax rate for the following levels of sole proprietorship earnings before taxes:

$13,700

$60,100

$90,800

$149,000

$249,000

$445,000

$1.3 million.

b. Plot the marginal tax rates (measured on the y-axis) against the pretax income levels (measured on the x-axis). Explain the relationship between these variables

Answer 1

Tax rate schedule is missing in your question. I have used the following schedule, usually available for such tax calculations:

$0 to	$9525	$0	+	(10%	amount over	$0)
9,525 to	38700	953	+	(12%	amount over	9,525)
38,700 to	82500	4454	+	(22%	amount over	38,700)
82,500 to	157500	14090	+	(24%	amount over	82,500)
157,500 to	200000	32090	+	(32%	amount over	157,500)
200,000 to	500000	45690	+	(35%	amount over	200,000)
500,000 to		150690	+	(37%	amount over	500,000)
			+		amount over

Part (a)

Earnings	Tax formula	Marginal Tax rate
$13,700	953 + (12% amount over 9,525)	12%
$60,100	4454 + (22% amount over 38,700)	22%
$90,800	14090 + (24% amount over 82,500)	24%
$149,000	14090 + (24% amount over 82,500)	24%
$249,000	45690 + (35% amount over 200,000)	35%
$445,000	45690 + (35% amount over 200,000)	35%
$1.3 million.	150690 + 37% amount over 500,000	37%

Part (b)

Marginal Tax rate 200,000 400,000 600,000 800,000 1,000,000 1,200,000 1,400,000

Relationship:

1. Increasing function, marginal tax rate increases as income increases

2. Marginal tax rate is a step function. Increases as a step, then remains constant, then again increases

3. As income increases to $500,000 the marginal tax rate approaches and peaks at 37%