Marginal Tax Rate (Incremental Tax Rate)
The term marginal tax rate is used to describe the amount of tax paid on the next incremental dollar of income earned. In the United States, the federal income tax system is a progressive tax; this means a taxpayer’s marginal tax rate increases as their income increases.
Also known as an incremental tax rate, marginal tax rates in the United States are progressive, which means the percentage of taxes owed increases as income increases. Marginal rates are applied as income passes through a system of tax brackets. In the United States, tax brackets range from a low of 10% to a high of 39.6%. In addition to indicating a taxpayer’s marginal rate of tax, a table of tax brackets would also indicate the income thresholds for each bracket. For example, a taxpayer making less than $9,000 per year may fall into the 10% tax bracket, while an individual making $1 million per year may fall into the 39.6% bracket.
A taxpayer’s marginal tax rate should not be confused with their average tax rate. The marginal rate describes the percentage of tax paid on the next dollar of income earned. If the tax system is progressive, then the taxpayer’s average rate of tax will always be lower than their marginal rate.
Proponents of a progressive tax believe individuals with higher levels of income should bear a larger share of the tax burden. Critics of the approach believe a system that takes an increasingly larger share of income discourages individuals from working harder and earning more income.