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

The marginal tax rate is the tax rate charged on an additional dollar earned.

Marginal Tax rate increases as the income level of the taxpayer increases.

Marginal Tax rate is the tax rate on the additional dollar of earning Taxable Income Bracket in Earnings Before Tax which Earnings before tax lie Marginal Tax $15,000 |$9,525 to $38,700 $60,000 $38,700 to $82,500 $90,000 $82,500 to 157,500 $150,000 $82,500 to 157,500 $250,000 $200,000 to $500,000 S450,000 $200,000 to $500,000 12%) (Amount over 15000 will be taxed at 12%) 22% 24% 32% 35% 35% 37% 10 12 $1,000,000 Over $500,000 14 15 16 17 Earnings Before Tax Marginal Tax $15,000 $60,000 $90,000 $150,000 $250,000 $450,000 19 24% 32% 35% 35% 37% 21 $1,000,000 26 27 Marginal Tax 35% 32 25% 35 36 37 38 39 15% 5% 50 $200,000 $400,000 $600,000 800,000 $1,000,000 $1,200,000 41 42 43 It can be seen from the chart that as pretax income increases the marginal tax rate increases Thus it follows a progressive tax system i.e. tax rate increases as income level increases.