Sue earns income of $80,000 per year. Her average tax rate is 30 percent. Sue paid 20 percent in taxes on the first $30,000 she earned. What was the marginal tax rate on the rest of her income?

Question

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To find out Sue's marginal tax rate, we need to know the tax rate applied to the next dollar she earns. Since Sue paid 20 percent on the first $30,000, she paid $6,000 in taxes ($30,000 x 0.20 = $6,000). This means that of the $80,000 she earned, she had $50,000 left to be taxed at a higher rate.

To find out what that rate is, we can use the formula:

Marginal tax rate = (tax paid on next dollar ÷ additional income earned)

To calculate the tax paid on the next dollar, we can subtract Sue's income over $30,000 from her total taxes paid:

$6,000 (total taxes paid) - $6,000 (taxes paid on first $30,000) = $0 (taxes paid on next dollar)

To calculate the additional income earned, we can subtract $30,000 from Sue's total income:

$80,000 (total income) - $30,000 (income taxed at 20%) = $50,000 (additional income taxed at marginal rate)

Now we can use the formula:

Marginal tax rate = ($0 ÷ $50,000) = 0%

This means that Sue's marginal tax rate on the rest of her income (above $30,000) is 0%. However, her average tax rate is still 30%, since she paid $24,000 in taxes on a total income of $80,000.

Sue Earns Income of $80,000 Per Year