What Is an Incremental Tax?

Incremental tax describes a tax system in which the tax percentage that a person pays increases based on their income level. This is also called a progressive income tax or a marginal rate tax.

In an incremental tax system, those with higher incomes pay a larger portion of the taxes collected by the state, and therefore contribute more to a state’s revenue than those with lower incomes.

In an incremental tax system, income levels are sorted into tax brackets. Each bracket pays a different percentage of their gross income to the government.

Key Takeaways

  • These taxes are incremental because they increase the tax you pay on greater increments of income.
  • Incremental taxes are also known as progressive taxes.
  • Incremental taxes are also known as redistributive taxes.

How Incremental Tax Works

Incremental taxes bracket earners based on their income and whether they are filing their returns as an individual or as a married couple.

The tables below show the rates and income levels for each type of filer in 2019: single, married filing jointly and heads of household

Incremental Tax Rates for Singles and Married Couples for 2019
Rate For Singles With Taxable Income Over For Married Filing Jointly With Taxable Income Over For Heads of Household With Taxable Income Over
10% $0  $0  $0  
12% $9,700  $19,400  $13,850
22% $39,475   $78,950 $52,850
24% $84,200 $168,400  $84,200
32% $160,725 $321,450 $160,000
35% $204,100 $408,200 $204,100
37% $510,300 $612,350 $510,300

Each "increment" in the tax table pays a different level of tax, and increments are taxed for every taxpayer progressively through the scale. This is the most misunderstood aspect of incremental taxes. The top earners who are in the 37% tax bracket do not pay 37% of their income to the federal government.

All earners who make less than $9,700 per year pay only 10% of their money in taxes, and with the standard deduction (for single filers, it's $12,200) you pay nothing at all in federal taxes -- though you may have to pay state, local and FICA taxes.

If you make more than $510,300 as a single filer, you pay 10% on the first $9,700, 12% on the next $29,300, 22% on the next $44,725, 32% on the next $76,525, 35% on the next $43,375, and 37% on the next $306,200 for a final total of $167,288.75 or 32.78% of your income -- not the top bracket rate of 37%. (You save $20,000 with the incremental method.)

Real World Example of Incremental Tax

Take for example an individual earning $38,000 per year through a salaried job. That income level puts them in a tax bracket that contains individuals who gross between $9,700 and $39,475 per year. In that tax bracket, this person is required by the IRS to pay $970 plus 12% of any amount over $9,700 but below $39,475, which in this case is $3,417. So, $970 plus $3,417 equals a total of $4,417 that this person must pay in taxes. After paying their taxes, they will have netted $33,583.

This person may decide that they want to earn some extra money through a second job. If they take on another part-time job and through that job earn an extra $2000 per year, they now fall within a new tax bracket because they earn $40,000. This bracket contains individuals who gross between $39,475 and $84,200.

In this bracket, the individual must now pay $4,417 plus 22% of the amount over $39,475, which in this case is now $525. The total tax they now owe is $4532.50. After paying taxes, they will have netted $35,467.50. They are still netting more money with a small increase in income, despite being in a new tax bracket.

It is important to note that this example does not account for deductions, including the standard deduction, which also affects the amount of tax that a person pays when filing their tax returns. It also does not account for state, local and FICA taxes.