What is a Marginal Tax Rate?

A marginal tax rate is the rate at which tax is incurred on an additional dollar of income. In the United States, the federal marginal tax rate for an individual will increase as income rises. This method of taxation, referred to as progressive taxation, aims to tax individuals based upon their earnings, with low-income earners being taxed at a lower rate than higher income earners. 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.

Key Takeaways

  • The marginal tax rate is the tax rate paid on the next dollar of income.
  • Under the progressive income tax method used for federal income tax in the United States, the marginal tax rate increases as income increases.
  • Marginal tax rates are separated by income levels into seven tax brackets.

Understanding the Marginal Tax Rate

Under a marginal tax rate, taxpayers are most often divided into tax brackets or ranges, which determine the rate applied to the taxable income of the tax filer. As income increases, what is earned will be taxed at a higher rate than the first dollar earned. In other words, the first dollar earned will be taxed at the rate for the lowest tax bracket, the last dollar earned will be taxed at the rate of the highest bracket for that total income, and all the money in between is taxed at the rate for the range it falls into.

Marginal tax rates can be changed by new tax laws. The current marginal tax rates went into effect in the United States as of January 1, 2018, with the passage of the Tax Cuts and Jobs Act (TCJA). Under the previous law, the seven brackets were 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent, and 39.6 percent. The new plan, signed into law by President Donald Trump in December 2017, keeps the seven bracket-structure. However, adjustments were made to the tax rates and income levels. Under the TCJA, the new rates are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.

Marginal Tax Rates Example

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

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

Individuals who make the lowest amount of income are placed into the lowest marginal tax rate bracket, while higher earning individuals are placed into higher marginal rate tax brackets. However, the marginal tax bracket in which an individual falls does not determine how the entire income is taxed. Instead, income taxes are assessed on a progressive level. Each bracket has a range of income values that are taxed at a particular rate. 

So, under the new plan, if an individual taxpayer earned $150,000 in income, they would owe the following income taxes for 2019, as shown below:

10% Bracket: ($9,700 - $0) x 10% = $970.00

12% Bracket: ($39,475 - $9,700) x 12% = $3,573.00

22% Bracket: ($84,200 - $39,475) x 22% = $9,839.50

24% Bracket: ($150,000 - $84,200) x 24% = $15,792.00

32% Bracket: Not applicable

35% Bracket: Not applicable

37% Bracket: Not applicable

If you add these up, the entire tax liability for this individual would be $30,174.50, or an effective tax rate of 20.1% ($30,174.50 / $150,000).

The seven marginal tax rates of the brackets remain constant regardless of a person's filing status. However, the dollar ranges at which income is taxed at each rate change depending on whether the filer is a single person, a married joint filer, or a head of household filer. In addition, due to a provision in the tax code referred to as indexing, the dollar range of each marginal tax bracket typically increases annually to account for inflation.

Marginal Tax Rate vs. Flat Tax Rate

The other type of tax rate is the flat tax rate, which a few states implement for state income tax. In this case, people aren’t taxed on a scale (like the marginal tax rate), but rather, flat across the board. That means that regardless of the income level, everyone is charged the same rate. Most systems that use a flat tax rate do not allow for deductions and are seen in countries with a rising economy. Those who support this kind of system of taxation call it fair, saying it taxes all people and businesses at the same rate.