Algernon, a small proprietorship owned by an unmarried individual, has a taxable income of $80,000. What is its tax bill? Its average tax rate? Its marginal tax rate?

From Table 2.3, we see that the tax rate applied to the first $9,950 is 10 percent; the rate applied over that up to $40,525 is 12 percent; the rate applied after that up to our total of $80,000 is 22 percent. So Algernon must pay .10 × $9,950 + .12 × ($40,525 − 9,950) + .22 × ($80,000 − 40,525) = $13,348.50. The average tax rate is thus $13,348.50/$80,000 = .1669, or 16.69%. The marginal rate is 22 percent because Algernon’s taxes would rise by 22 cents if it earned another dollar in taxable income.

Table 2.3

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Taxable Income 0-9,950 9,950-40,525 40,525-86,375 86,375-164,925 164,925-209,425 209,425-523,600 523,600+ Tax Rate 10% 12 22 24 32 35 37