How is income tax Calculated?   

The Income tax system is called as 'Progressive taxation system'.

This means the tax rate will increase as  income increases.

In Reality it is just opposite:

For the Financial year 2012-13

Income SLABs:                TAX on the income

$ 1                               $    18,200            No Tax payable

$ 18,201  to                 $   37,000            19% on excess of $ 18.2K (i.e. Tax $ 3572 if income $ 37K)

$ 37,001  to                 $   80,000            32.5% on excess of $ 37K + $3,572 (Tax for income to $37K)

$ 80,001  to                 $1,80,000            37% on excess of $ 80K + $ 17,547 ($3572 Tax  on $37K

                                                                +  $ 13,975 Tax on $ 37K to $ 80K)

$180,001 to                 unlimited             45% on excess of $ 180K + $54,547 ($ 3572 Tax on $ 37K +

                                                                tax $ 13,975 on 37K to 80K + tax on $80K to $180 K)

99% people, glancing the above table, like to identify themselves to a particular slab above, check the tax payable and leave it at that. This helps the situation continue for years.