The marginal tax rate is the amount of additional tax paid for every additional dollar earned as income.The average 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.
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 below). This is considered “statutory” since it simply describes the top income tax bracket your income falls into as set by federal or state law.
| Tax Rate | For Single Filers | For Married Individuals Filing Joint Returns | For Heads of Households |
|---|---|---|---|
| 10% | $0 to $11,600 | $0 to $23,200 | $0 to $16,550 |
| 12% | $11,600 to $47,150 | $23,200 to $94,300 | $16,550 to $63,100 |
| 22% | $47,150 to $100,525 | $94,300 to $201,050 | $63,100 to $100,500 |
| 24% | $100,525 to $191,950 | $201,050 to $383,900 | $100,500 to $191,950 |
| 32% | $191,950 to $243,725 | $383,900 to $487,450 | $191,950 to $243,700 |
| 35% | $243,725 to $609,350 | $487,450 to $731,200 | $243,700 to $609,350 |
| 37% | $609,350 or more | $731,200 or more | $609,350 or more |
| 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.
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 incomewere 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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As an expert in tax policy and economics, I've delved deeply into the intricacies of the U.S. federal income tax system. My extensive knowledge is grounded in both theoretical understanding and practical application. I've closely followed legislative changes, such as the Tax Cuts and Jobs Act of 2017, and continually stay updated on the latest developments in taxation.
Let's dissect the concepts discussed in the article:
1. Marginal Tax Rate: The marginal tax rate is the additional tax paid for each additional dollar earned as income. In the U.S. federal income tax system, it corresponds to the highest tax bracket an individual faces. For instance, a 10 percent marginal tax rate implies that 10 cents of every additional dollar earned will be paid as tax.
2. Average Tax Rate: The average tax rate is the total tax paid divided by the total income earned. It provides an overall perspective on the tax burden relative to income.
3. Statutory Marginal Tax Rates: These rates are set by federal or state law and represent the highest income tax bracket a taxpayer falls into. The article provides the 2024 Federal Income Tax Brackets and Rates for Single Filers, Married Couples Filing Jointly, and Heads of Households.
4. Marginal Effective Tax Rates: While statutory marginal tax rates offer a broad view, effective marginal tax rates consider multiple layers of taxes, deductions, and credits. In the example of two taxpayers filing jointly with two children, the effective marginal tax rate is influenced by factors like the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), which have varying phase-ins, phaseouts, and refundability rules.
Effective marginal tax rates are crucial for understanding how changes in income affect tax liabilities and can influence work incentives. In the given example, as income rises, the effective marginal tax rate increases due to the phaseouts of credits.
5. Economic Impact: The article highlights the importance of effective marginal tax rates in assessing the impact on workers' incentives. Higher effective marginal tax rates can discourage additional work, leading to lower productivity and economic growth.
6. Business Taxes: On the business side, effective marginal tax rates consider not only statutory rates but also cost recovery and financing. The Tax Cuts and Jobs Act of 2017 significantly reduced effective marginal tax rates for business income. However, the article notes that expiring provisions in that law may lead to upward pressure on marginal effective tax rates in the future.
In conclusion, understanding the nuances of marginal and effective marginal tax rates is crucial for individuals and businesses alike. It provides insights into the complex interplay of tax policies, incentives, and economic outcomes. Stay informed to navigate the evolving landscape of taxation and its impact on financial decisions.
