How is the marginal rate of tax (MRT) calculated?

The marginal rate of tax (MRT) is calculated by determining the change in tax payable that results from a change in taxable income. This ratio helps to understand how much additional tax one pays per additional unit of income earned.

In practice, the marginal rate of tax focuses specifically on the incremental aspects of taxation, for instance, if a taxpayer earns an extra dollar, the MRT indicates how much tax must be paid on that dollar. This is essential in assessing the impacts of tax on economic behavior, such as work incentives or investment decisions.

Using the formula for calculating MRT, by dividing the change in tax payable by the change in taxable income and then multiplying by 100, gives a clear percentage that illustrates the tax burden associated with additional income. This measure is crucial in tax policy analysis and helps in comparing the incentives generated by different tax rates.