Marginal Tax Rate

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DEFINITION of 'Marginal Tax Rate'

The amount of tax paid on an additional dollar of income. The marginal tax rate for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon their earnings, with low income earners being taxed at a lower rate than higher income earners.

INVESTOPEDIA EXPLAINS 'Marginal Tax Rate'

Under a marginal tax rate, tax payers are most often divided into tax brackets or ranges, which determine which rate taxable income is taxed at. As income increases, what is earned will be taxed at a higher rate than your first dollar earned. While many believe this is the most equitable method of taxation, many others believe this discourages business investment by removing the incentive to work harder.

To learn more about how the marginal tax rate system works, check out Can moving to a higher tax bracket cause me to have a lower net income? 

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