Which statement best describes marginal tax rates?

• A. Marginal tax rates refer to the tax rate applied to the last dollar of income earned.
• B. Marginal tax rates are the average rate paid on all income.
• C. Marginal tax rates are the total amount of taxes paid divided by total income.
• D. Marginal tax rates are fixed and do not change as income increases.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of marginal tax rate. It is the rate at which the last dollar of income is taxed, meaning it applies to the next additional dollar earned.
2. Step 2: Differentiate marginal tax rate from average tax rate. The average tax rate is calculated as total taxes paid divided by total income, representing the overall percentage of income paid in taxes.
3. Step 3: Recognize that marginal tax rates can change as income increases, especially in progressive tax systems where higher income brackets are taxed at higher rates.
4. Step 4: Analyze each statement in the problem: identify which one correctly defines marginal tax rate as the tax rate on the last dollar earned.
5. Step 5: Conclude that the statement 'Marginal tax rates refer to the tax rate applied to the last dollar of income earned' best describes marginal tax rates.