Marginal Tax Rate

Marginal Tax Rate refers to the percentage of tax applied to an additional dollar of income. It is the rate at which the last dollar earned is taxed, influencing decisions about earning more income.

For instance, in a progressive tax system:

• If the Tax Brackets are as follows:
• 0% on income up to $10,000
• 10% on income from $10,001 to $40,000
• 20% on income from $40,001 to $80,000
• A person earning $45,000 would have:
• 0% on the first $10,000
• 10% on the next $30,000 ($10,001 to $40,000)
• 20% on the last $5,000 ($40,001 to $45,000)
• Here, their Marginal tax rate is 20%, as this is the rate on the last dollar earned.

In a different case, if an individual’s income increases to $50,000:

• The Marginal tax rate remains at 20% for income above $40,000.

This means that any additional income earned above $50,000 will be taxed at the Marginal rate of 20%.