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

Question

Quizplus · Accepted Answer

The marginal tax rate is the rate at which additional income is taxed. To find the marginal tax rate on the additional $10,000 of income, we need to find the tax incurred on that amount, which is:

($30,000 - $20,000) x 25% = $2,500

Therefore, the marginal tax rate on the additional $10,000 of income is:

$2,500 / $10,000 = 0.25, or 25%

So the correct answer is choice C.

Assume That in Year 1 You Pay an Average Tax