Marginal Tax Rate

What is the Marginal Tax Rate?

The marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The marginal tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax.

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Statutory Marginal Tax Rates

In terms of the U.S. federal income tax system, your statutory marginal tax rate corresponds to the highest tax bracket you face (see above). This is considered “statutory” since it simply describes the top income tax bracket your income falls into as set by federal or state law.

2020 Tax Brackets and Rates
Rate For Single Individuals, Taxable Income Over For Married Individuals Filing Joint Returns, Taxable Income Over For Heads of Households, Taxable Income Over
10% $0 $0 $0
12% $9,875 $19,750 $14,100
22% $40,125 $80,250 $53,700
24% $85,525 $171,050 $85,500
32% $163,300 $326,600 $163,300
35% $207,350 $414,700 $207,350
37% $518,400 $622,050 $518,400

Source: Internal Revenue Service

Marginal Effective Tax Rates

While useful in some contexts, statutory marginal tax rates do not paint a complete picture. “Effective” marginal tax rates are useful to calculate because they account for the multiple layers of taxes (such as the income tax and payroll tax) alongside relevant deductions and credits.

Take, for example, two taxpayers filing jointly with two children. At low levels of income, the taxpayers face negative marginal tax rates due to the fully refundable Earned Income Tax Credit (EITC) and partially refundable Child Tax Credit (CTC).

Both credits have separate phase-in and phaseout rates, thresholds, and refundability rules, which create changing effective marginal tax rates as taxpayer income rises. As the couple’s income rises above $15,000, the CTC and EITC phase-ins end, and the effective marginal tax rate rises above 0. Eventually, the taxpayers face a marginal tax rate of up to 46.36 percent when earning over $36,801 due to the phaseout of the EITC, the 15.3 percent payroll tax, and the 10 percent individual income tax.

Marginal tax rate on labor income up to $100,000 married filing jointly, two children, 2020, Marginal Tax Rates on Labor Income in the U.S. After the Tax Cuts and Jobs Act

Effective marginal tax rates are important to calculate because they show how workers may be discouraged to work additional hours and earn higher incomes. Higher effective marginal tax rates disincentivize additional work at the margin, which translates into lower productivity and economic growth overall.

On the business side, effective marginal tax rates account not only for statutory rates but also cost recovery and financing. Effective marginal tax rates for business income were significantly reduced by the Tax Cuts and Jobs Act of 2017 but expiring provisions in that law will put upward pressure on marginal effective tax rates in the coming years.

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