Refer to the table below: 2014 Tax Data Tax Bracket Marginal Tax Rate $0-9,075 1

Question

Refer to the table below: 2014 Tax Data Tax Bracket

Marginal Tax Rate

$0-9,075

10% $9,075-36,900

15 $36,900-89,350

25 $89,350-186,350

28 $186,350-405,100

33 $405,100-406,750

35 Over $406,750 39.6

Compute the taxes on a taxable income of $25,000 in order to answer the following questions.

(a) What is the marginal tax rate? 15% Instructions: Enter your responses as a percent rounded to the nearest whole number.

(b) What is the nominal tax rate? ______% Instructions: Enter your responses as a percent rounded to the nearest two decimal places.

Explanation / Answer

Answer:

(a) What is the marginal tax rate?

      The tax on a taxable income is: $25,000, and it is falls in the 2nd row which is a tax rate of 15%. Marginal tax rate is the rate applied to the income, so the marginal tax rate is 15%, as shown in the table.

(b) What is the nominal tax rate?

The nominal tax rate or average tax rate is the weighted average of all the tax rates applied. That is:

The first 9,075 is at 10%

The next (9,075-36,900) is at 15% and etc.

   To find the nominal tax rate, we multiply each range by the marginal tax rate, up until the 25,000 mark, add those up, and divided by the 25,000 you are being taxed on.

Thus,     = 9,075(0.10) + 27,825 (0.15)

                = 907.5 + 4173.75

                = 5081.25

Now we can divided by 25,000, then we get:

    That is:              = (5081.25 * 100)/25000

                                = 20.4%

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