Assume that in year 1 you pay an average tax rate of 20 percent on a taxable income of $20,000. In year 2, you pay an average tax rate of 25 percent on a taxable income of $30,000. Assuming no change in tax rates, the marginal tax rate on your additional $10,000 of income is

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The marginal tax rate is calculated by the additional tax paid on the additional income earned. In year 1, the tax paid is 20% of $20,000 = $4,000. In year 2, the tax paid is 25% of $30,000 = $7,500. The additional tax paid on the additional $10,000 of income is $7,500 - $4,000 = $3,500. Therefore, the marginal tax rate is $3,500 / $10,000 = 35%.

Assume That in Year 1 You Pay an Average Tax