Tax Bracket

AAA

DEFINITION of 'Tax Bracket'

The rate at which an individual is taxed. Tax brackets are set based on income levels; individuals with lower income levels are taxed at a lower rate than individuals with higher income levels. Tax brackets serve as cutoff points for given income tax rates; therefore, if an individual's annual taxable income exceeds the cutoff point, that person is taxed according to the next tax bracket.

INVESTOPEDIA EXPLAINS 'Tax Bracket'

Most countries tax individual incomes using a system of tax brackets. This structure implements what is referred to as a progressive tax system, in which taxation progressively increases as an individual's income grows. This contrasts with a flat tax structure, in which all individuals are taxed at the same rate, regardless of their income levels.

Proponents of the use of tax brackets and a progressive tax system contend that individuals with high incomes are more able to pay income taxes while maintaining a high standard of living, while low-income individuals struggle to meet their basic needs, and should be subject to less taxation.

Furthermore, the use of tax brackets has an automatic stabilizing effect on an individuals' after-tax income, as a decrease in salary is counteracted by a decrease in tax rate, leaving the individual with a less substantial decrease in after-tax income.

To learn more about tax brackets, read What's the difference between a tax rate and a tax bracket?

RELATED TERMS
  1. Uncle Sam

    A nickname dating back to 1812 used to refer to the U.S. government. ...
  2. Flat Tax

    A system that applies the same tax rate to every taxpayer regardless ...
  3. Internal Revenue Service - IRS

    A United States government agency that is responsible for the ...
  4. Tax Liability

    The total amount of tax that an entity is legally obligated to ...
  5. Tax Schedule

    A rate sheet used by individual taxpayers to determine their ...
  6. Tax Table

    A table or chart displaying the amount of tax due based on income ...
Related Articles
  1. Tax Tips For The Individual Investor
    Retirement

    Tax Tips For The Individual Investor

  2. How do I find out what my tax bracket ...
    Taxes

    How do I find out what my tax bracket ...

  3. What's the difference between a tax ...
    Taxes

    What's the difference between a tax ...

  4. Can moving to a higher tax bracket cause ...
    Taxes

    Can moving to a higher tax bracket cause ...

comments powered by Disqus
Hot Definitions
  1. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets produced or acquired last are the ones that are used, sold ...
  2. Ghosting

    An illegal practice whereby two or more market makers collectively attempt to influence and change the price of a stock. ...
  3. Elasticity

    A measure of a variable's sensitivity to a change in another variable. In economics, elasticity refers the degree to which ...
  4. Tangible Common Equity - TCE

    A measure of a company's capital, which is used to evaluate a financial institution's ability to deal with potential losses. ...
  5. Yield To Maturity (YTM)

    The rate of return anticipated on a bond if held until the maturity date. YTM is considered a long-term bond yield expressed ...
  6. Net Present Value Of Growth Opportunities - NPVGO

    A calculation of the net present value of all future cash flows involved with an additional acquisition, or potential acquisition. ...
Trading Center