If a company pays taxes of 20 percent on their first $20,000 of pretax income, and 30 percent on any taxable income in excess of $20,000, what is the marginal tax rate if current pretax income is $45,000?

Question

Quizplus · Accepted Answer

For the first $20,000 of pretax income, the tax rate is 20%. This means the tax paid on the first $20,000 is 0.2 x $20,000 = $4,000. 
Taxable income in excess of $20,000 is $45,000 - $20,000 = $25,000. The tax paid on this amount is 0.3 x $25,000 = $7,500. 
Therefore, the total tax paid on $45,000 of pretax income is $4,000 + $7,500 = $11,500. 
The marginal tax rate is the tax rate applied to the next dollar of income. In this case, the marginal tax rate on an additional dollar of pretax income would be 30%, which is the tax rate applied to any taxable income in excess of $20,000. Hence, the answer is 30 percent.

If a Company Pays Taxes of 20 Percent on Their