Question

Which of the following statements is CORRECT?

I. The marginal tax rate is determined by dividing the tax a person pays by his taxable income.
II. In the progressive tax system, the more taxable income a taxpayer has, the higher the tax bracket in which the last dollar is taxed.
A) Neither I nor II
B) II only
C) Both I or II
D) I only

Answer 1

The correct answer is B) II only, as the marginal tax rate applies to the additional income earned within a progressive tax system, and is not determined by dividing total tax by taxable income.

Step-by-step explanation:

Statement I is incorrect because the marginal tax rate is determined by the rate of tax that applies to the last dollar of taxable income, not by dividing the tax a person pays by his taxable income. However, statement II is correct as it describes the nature of a progressive tax system, where taxpayers with higher taxable incomes fall into higher tax brackets, meaning the last dollar they earn is taxed at a higher rate.

Understanding the marginal tax rate is essential as it affects financial decisions and planning. The marginal tax rate comes into play when an individual earns additional income and it determines the tax rate for that additional income. For example, if through a raise or a side job, an individual's income increases enough to push them into a higher tax bracket, only the income above the previous bracket's threshold is taxed at the higher rate. In 2023, U.S. federal tax rates ranged from 10% to 37%, with the percentages applying to specific income brackets.