Question

Cora’s tax base is $50,000. If she pays a tax of $3,000 on the first $30,000 and $3,000 on the next $20,000:

a) What is her marginal tax rate (MTR)?

b) What type of rate structure is she subject to?

Answer 1

Requirement a:

The marginal tax rate is the tax rate the tax payer pays on the next dollar of taxable income. It can be calculated in the present case as follows

The tax rate in the first bracket = 10% ($3,000 ÷ $30,000)

The tax rate in the second bracket = 15% ($3,000 ÷ $20,000)

In this case the tax payer is taxed at 10% when her taxable income is less then and equal to $30,000 and at 15% when her taxable income is over $30,000 and therefore her current marginal tax rate is 15%.

Requirement b:

The taxpayer is subject to progressive tax structure as increasing marginal tax rate is applied when the taxable income of tax payer increases.