Ralph earns $40,000 per year.According to the income tax schedule,he must pay $4,000 in income taxes this year.If he had earned $50,000 his tax liability would have been $6,000.What marginal tax rate does Ralph face?

Question

Quizplus · Accepted Answer

The marginal tax rate is the tax rate that is applied to the next additional dollar of income. To find out Ralph's marginal tax rate, we need to determine how much his taxes would increase if he earned one more dollar of income.

If Ralph's tax liability increased from $4,000 to $6,000 when his income increased from $40,000 to $50,000, then his tax liability increased by $2,000. This means that his marginal tax rate is:

Marginal tax rate = (increase in taxes) / (increase in income)
Marginal tax rate = $2,000 / ($50,000 - $40,000)
Marginal tax rate = $2,000 / $10,000
Marginal tax rate = 0.20 or 20%

Therefore, Ralph faces a marginal tax rate of 20%.

Ralph Earns $40,000 Per Year