marginal tax rate

Examples of marginal tax rate in the following topics:

• Comparing Marginal and Average Tax Rates

  • The marginal tax rate is sometimes defined as the tax rate that applies to the last (or next) unit of the tax base (taxable income or spending), it is in effect, the tax percentage on the highest dollar earned.
  • For example, if a company pays 5% tax on its first $100,000 earned, and 10% on the next $100,000, the marginal tax rate of earning the $101,000th dollar is 10%.
  • Broadly, the marginal tax rate equals the change in taxes, divided by the change in tax base, expressed as a percentage.
  • The term "progressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from low to high, where the average tax rate is less than the marginal tax rate.
  • "Regressive" describes a distribution effect on income or expenditure, referring to the way the rate progresses from high to low, where the average tax rate exceeds the marginal tax rate.

• Fiscal Levers: Spending and Taxation

  • The tax multiplier is the magnification effect of a change in taxes on aggregate demand.
  • where MPC is the marginal propensity to consume (the change in consumption divided by the change in disposable income), and MPS is the marginal propensity to save (the change in savings divided by the change in disposable income).
  • The multiplier effect of a tax cut can be affected by the size of the tax cut, the marginal propensity to consume, as well as the crowding out effect.
  • The crowding out effect occurs when higher income leads to an increased demand for money, causing interest rates to rise.
  • Analyze the use of changes in the tax rate as a form of fiscal policy

• Corporate and Payroll Taxes

  • Many countries impose a corporate tax, also called corporation tax or company tax, on the income or capital of some types of legal entities.
  • The taxes may also be referred to as income tax or capital tax.
  • The rate of tax varies by jurisdiction; however, most companies provide or make public the effective tax rate on the income earned.
  • The effective tax rate is the average corporate tax rate on the company's income and this takes into consideration tax benefits included in a current tax year.
  • Corporations are also subject to a variety of other taxes including: property tax, payroll tax, excise tax, customs tax and value-added tax along with other common taxes, generally in the same manner as other taxpayers.

• Short Run Firm Production Decision

  • Increase production if the marginal cost is less than the marginal revenue.
  • The firm will also take adjustments into account that can disturb equilibrium such as the sales tax rate.
  • In a perfectly competitive market, the short run supply curve is the marginal cost (MC) curve at and above the shutdown point.
  • The portions of the marginal cost curve below the shutdown point are no part of the supply curve because the firm is not producing in that range.
  • The short run supply curve is the marginal cost curve at and above the shutdown point.

• Trading off Equity and Efficiency

  • Income taxes are a laddered progressive tax where income tax rates are set in income bands or ranges.
  • Each tax rate corresponds to a particular income range; income above a tax range is subject to a higher tax rate that corresponds to a higher income range and income below a specific range is subject to a lower tax rate, similarly identified with a lower income range.
  • Within any given income range, the tax rate is the same.
  • At the highest income tax rate, income taxes can become regressive, since high earners are only subject to a constant albeit highest rate on their income.
  • Income tax is a progressive tax that assumes a regressive nature at the highest tax rate.

• Marginal Revenue Productivity and Wages

  • In a perfectly competitive market, the wage rate is equal to the marginal revenue product of labor.
  • We know that a profit-maximizing firm will increase its factors of production until their marginal benefit is equal to the marginal cost.
  • Therefore, firms will continue to add labor (hire workers) until the MRPL equals the wage rate.
  • The graph shows that a factor of production - in our case, labor - has a fixed supply in the long run, so the wage rate is determined by the factor demand curve - in our case, the marginal revenue product of labor.
  • The intersection of vertical supply and the downward sloping demand gives the wage rate.

• Taxes

  • Proportional Tax: Otherwise known as a flat tax, a flat tax rate is applied to all earned income regardless of how much the taxpayer earns.
  • So a person making $20,000 would pay the same rate as a person making $120,000, but would pay significantly less in real dollars.
  • Progressive Tax: The more a person earns, the higher the tax rate.
  • Regressive Tax:In a regressive tax system, poorer families pay a higher tax rate.
  • Categorize types of taxes into ad valorem taxes and excise taxes

• Deriving the Labor Demand Curve

  • Firms will demand labor until the marginal revenue product of labor is equal to the wage rate.
  • The cost of labor to a firm is called the wage rate.
  • Suppose workers are available at an hourly rate of $10.
  • Firms maximize profit when marginal costs equal marginal revenues, and in the labor market this means that firms will hire more employees until the wage rate (marginal cost of labor) equals the MRPL.
  • This both increases the number of employed workers and increases the wage rate.

• Financing State and Local Government

  • Taxes are the primary source of revenue for state and local governments; income, property, and sales taxes are common examples of state and local taxes.
  • State and local income tax rates vary widely by jurisdiction and many are graduated, or increase progressively as income levels increase.
  • Sales tax rates also vary widely among jurisdictions, from 0% to 16%, and may vary within a jurisdiction based on the particular goods or services taxed.
  • Sales tax is collected by the seller at the time of sale, or remitted as use tax by buyers of taxable items who did not pay sales tax.
  • Property tax rules and rates vary widely.

• Marginal Product of Labor (Physical)

  • The marginal product of labor is the change in output that results from employing an added unit of labor.
  • When production is discrete, we can define the marginal product of labor as ΔY/ΔL where Y is output.
  • gives another example of marginal product of labor.
  • This table shows hypothetical returns and marginal product of labor.
  • Note that in reality this firm would never hire more than seven employees, since a negative marginal product is bad for the firm regardless of the wage rate.