Tax & income
Marginal vs. effective tax rate: Definition, Formula and Example
A marginal tax rate applies to an additional amount of taxable income; an effective tax rate divides a stated tax amount by a stated income measure.
Scope: Progressive income-tax concept with U.S. explanatory sources. The worked brackets are fictional and not a filing calculation.
Other names and related labels: Marginal tax bracket; Average tax rate.
How it works
In a progressive system, different layers of taxable income face different rates. Entering a higher bracket does not ordinarily apply that rate to all earlier layers. Credits, phaseouts and other taxes can affect the actual tax change from extra earnings.
Effective rate = tax / defined income base; marginal rate = change in tax / change in income for the increment considered
State whether the denominator is taxable income, gross income or another measure. Different definitions produce different effective rates.
A two-bracket hypothetical tax system
Tax the first $20,000 at 10% and the next $10,000 at 20%.
- Tax on $30,000: $20,000 × 10% + $10,000 × 20% = $4,000.
- Effective rate on taxable income: $4,000/$30,000 ≈ 13.3333%.
- An extra $1,000 in the same upper bracket adds $200 of tax.
The illustrated marginal bracket is 20%; the effective rate on taxable income is about 13.3333%.
Invented brackets for explanation, not a U.S. tax-year table; no deductions, credits, phaseouts or other taxes.
The worked example uses the assumptions above. Related tools may model a different scope; check their descriptions before comparing results.
A tax bracket is not the percentage lost from every dollar earned
Payroll taxes and benefit phaseouts can also affect additional take-home income. Withholding is a payment toward tax and need not equal final liability or an effective rate.
Explore with a calculator
- Income Tax Calculator
Use the explicitly supported tax year and filing assumptions.
- Marriage Tax Calculator
Compare modeled combined taxes with consistent household inputs.
- Take-Home-Paycheck Calculator
Separate withholding and payroll deductions from final income-tax liability.
Sources and checks
Definition and example arithmetic checked . Sources explain the concepts; numerical examples use the assumptions stated above.
Calculation methodology and review status · All glossary terms