Marginal Tax Rate

Marginal Tax Rate

A marginal tax rate is the percentage of tax applied to each additional dollar of taxable income within a specific tax bracket. It tells you how much tax you will pay on the next dollar you earn, not the share of your total income that goes to taxes.

How it works

• Taxable income is divided into brackets; each bracket is taxed at a different rate.
• When your income rises into a higher bracket, only the portion above that bracket’s threshold is taxed at the higher rate. Your earlier dollars remain taxed at the lower bracket rates.
• This creates a progressive, stepped increase in tax liability rather than a sudden jump when you move into a higher bracket.
• Your effective tax rate (total tax paid divided by total income) will always be lower than your highest marginal rate.

Key takeaways

• Marginal tax rate = tax on the next dollar of taxable income.
• Rates apply only to income within each bracket, not to total income.
• Moving into a higher bracket does not mean all income is taxed at the higher rate.
• Effective tax rate < highest marginal tax rate.

Marginal tax vs. flat tax

• Marginal (progressive) tax systems use multiple brackets and rising rates as income increases.
• A flat tax applies a single rate to all taxable income.
• Proponents of flat tax systems say they are simpler and may encourage growth; critics say they can be less equitable.
• Fast fact: many flat-tax regimes limit or eliminate common deductions.

Example

Using U.S. federal tax brackets for a single filer (2025), consider taxable income of $195,000:
– Total tax liability (per the referenced bracket schedule): $39,647.
– Effective tax rate: 39,647 ÷ 195,000 ≈ 20.3%.
– If a flat 24% tax were applied instead, tax would be 195,000 × 0.24 = $46,800 — about $7,150 more than under the progressive schedule.

Important: real-world tax calculations typically begin with gross income minus the standard deduction and any other deductions or credits, so taxable income and final tax liability are usually lower than gross-income calculations.

Why it matters

Understanding your marginal tax rate helps with:
– Wage and bonus negotiations (knowing how much of a raise you actually keep).
– Retirement, investment and tax-advantaged account planning.
– Timing income or deductions to manage tax exposure.

Sources

• U.S. National Archives — 16th Amendment
• Tax Foundation — Marginal Tax Rate reference material
• Brookings Institution — analyses of tax structure and economic effects
• Urban Institute — historical perspectives on marginal tax rates