Re: Tax question...
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The reason you use the bracket percentage is because this incremental income will be taxed at that rate.
Easy to see example:
Tax Bracket 1 = 0% up to $100
Tax Bracket 2 = 90% on every dollar over $100.
Presently you make $100, so you pay no tax. Now you invest in the money market fund and make $5. You are taxed at 90% on this $5, so you pay $4.50 in taxes. Your effective tax rate is $4.5/$105 = 4.2%.
Next year you make $400. Your tax liability is $270/$400 = 67.5%. You can see the effect of the bracket even further now. On every additional dollar you earn, you are only going to bring home 10% of that money.
Make sense?
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I don't think you said anything different than what he is talking about..
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