Question:

A marginal tax rate of 35% means that…

(a) A tax of $0.35 is imposed on each dollar of taxable income.

(b) The average tax rate is higher than 35%.

(c) A tax of $0.35 is imposed on each additional dollar of taxable income.

(d) None of the above

Answer:

(c)

Explanation:

(a) A tax of $0.35 imposed on each dollar of taxable income is called the income tax. Income tax is a tax levied on the income of individuals or business so the answer is not a.

(b) This answer refers to the average tax rate, which is the total income taxes paid divided by the total income. So the answer is not b.

(c) A tax of $0.35 imposed on each additional dollar of taxable income is the marginal tax rate. To illustrate this consider the following :

Taxable income between | Tax bracket |

0 and 8,025 | 10% |

8,025 and 32,550 | 15% |

32,550 and 78,850 | 25% |

78,850 and 164,550 | 28% |

164,550 and 357,700 | 33% |

357,700 and above | 35% |

Say you had a taxable income of $357,699 which would put you in the 33% tax bracket. For every additional dollar you earn after the $357,699, a tax of $0.35 would be imposed. So your marginal tax rate would be 35% and the answer is c.