Suppose the government taxes 25 percent of the first $60,000 of income and 40 percent of all income above $60,000. For a person earning $200,000, the marginal tax rate is

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The marginal tax rate is the tax rate on the last dollar earned. For a person earning $200,000, the last dollar earned is in the 40% tax bracket, so the marginal tax rate is 40%. The average tax rate is the total tax paid divided by the total income. For a person earning $200,000, the total tax paid is $60,000 x 0.25 + $140,000 x 0.40 = $72,000. The average tax rate is $72,000 / $200,000 = 36%.

Suppose the Government Taxes 25 Percent of the First $60,000