Tax Rate - Marginal

Marginal

A marginal tax rate is the tax rate that applies to the last unit of currency of the tax base (taxable income or spending), and is often applied to the change in one's tax obligation as income rises:

To calculate the marginal tax rate on an income tax:

• Let be the marginal tax rate.
• Let be the tax liability.
• Let be the taxable income.

For an individual, it can be determined by increasing or decreasing the income earned or spent and calculating the change in taxes payable. An individual's tax bracket is the range of income for which a given marginal tax rate applies. The marginal tax rate may increase or decrease as income or consumption increases, although in most countries the tax rate is (in principle) progressive. In such cases, the average tax rate will be lower than the marginal tax rate: an individual may have a marginal tax rate of 45%, but pay average tax of half this amount.

In a jurisdiction with a flat tax on earnings, every taxpayer pays the same percentage of income, regardless of income or consumption. Some proponents of this system propose to exempt a fixed amount of earnings (such as the first $10,000) from the flat tax.

In economics, marginal tax rates are important because they are one of the factors that determine incentives to increase income; at higher marginal tax rates, some argue, the individual has less incentive to earn more. This is the foundation of the Laffer curve, which claims taxable income decreases as a function of marginal tax rate, and therefore tax revenue begins to decrease after a certain point.

Public discussion of "high taxes" may refer to overall tax rates or marginal taxes.

Marginal tax rates may be published explicitly, together with the corresponding tax brackets, but they can also be derived from published tax tables showing the tax for each income. It may be calculated noting how tax changes with changes in pre-tax income, rather than with taxable income.

Marginal tax rates do not fully describe the impact of taxation. A flat rate poll tax has a marginal rate of zero, but a discontinuity in tax paid can lead to positively or negatively infinite marginal rates at particular points.