Suppose the government imposes a tax of 20 percent on the first $50,000 of income and 30 percent on all income above $50,000. What is the marginal tax rate when income is $60,000?

Question

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The marginal tax rate is the tax rate on the next dollar earned, so we need to find the tax rate on the next $10,000 earned above the $50,000 threshold. The tax rate on the first $50,000 is 20 percent, so the tax paid on that income is $50,000 x 0.20 = $10,000. That means the remaining $10,000 of income is taxed at the higher rate of 30 percent, so the tax on that income is $10,000 x 0.30 = $3,000. The total tax paid on an income of $60,000 is $10,000 + $3,000 = $13,000. The marginal tax rate is therefore the tax on the last $10,000 earned, which is $3,000. That means the marginal tax rate is 30 percent.

Suppose the Government Imposes a Tax of 20 Percent on the First