Tax Rate Definition, Effective Tax Rates, and Tax Brackets

What Is a Tax Rate?

A tax rate is a percentage at which an individual or corporation is taxed. The United States, both the federal government and many of the states, uses a progressive tax rate system, in which the percentage of tax charged increases as the amount of the person's or entity's taxable income increases. A progressive tax rate collects more from taxpayers with greater incomes.

Key Takeaways

  • A tax rate is a percentage at which an individual or corporation is taxed.
  • The U.S. imposes a progressive tax rate on income, where the greater the income, the higher percentage of tax levied.
  • Since the U.S. applies its tax rate in marginal increments, taxpayers end up being charged at an effective tax rate that is lower than that of the bracket rate.
  • Some other nations charge a flat tax rate or a regressive tax rate.

Understanding Tax Rates

To help build and maintain the infrastructure, the government commonly taxes its residents. The tax collected is used for the betterment of the nation, society, and all living in it. In the U.S. and many other countries around the world, a tax rate is applied to money received by a taxpayer.

Whether earned from wages or salary, investment income like dividends and interest, capital gains from investments, or profits made from goods or services, a percentage of the taxpayer’s earnings or money is taken and remitted to the government.

When it comes to income tax, the tax rate is the percentage of an individual's taxable income or a corporation's earnings that is owed to state, federal, and, in some cases, municipal governments. In certain municipalities, city or regional income taxes are also imposed.

The tax rate that is applied to an individual’s earnings depends on the marginal tax bracket that the individual falls under. The marginal tax rate is the percentage taken from the next dollar of taxable income above a pre-defined income limit. The marginal tax rate used by the U.S. government is indicative of its progressive tax system.

Effective Tax Rates

For individuals, the dollar threshold for each tax rate is dependent upon the status of the filer, whether they are single, the head of a household, married filing separately, or married filing jointly. The marginal tax brackets for 2022 are:

Tax Brackets, 2022
2022 Rate Single Individual Married Individuals Filing Jointly Married Individuals Filing Separately Head of Household
10% $10,275 or less $20,550 or less $10,275 or less $14,650 or less
12% $10,276 to $41,775 $20,551 to $83,550 $10,276 to $41,775 $14,651 to $55,900
22% $41,776 to $89,075 $83,551 to $178,150 $41,776 to $89,075 $55,901 to $89,050
24% $89,076 to $170,050 $178,151 to $340,100  $89,076 to $170,050 $89,051 to $170,050
32% $170,051 to $215,950 $340,101 to $431,900 $170,051 to $215,950 $170,051 to $215,950
35% $215,951 to $539,900 $431,901 to $647,850 $215,951 to $323,925 $215,951 to $539,900
37% Over $539,900 Over $647,850 Over $332,925 Over $539,900
Source: Internal Revenue Service

The marginal tax brackets for 2023:

Tax Brackets, 2023
2023 Rate Single Individual Married Individuals Filing Jointly Married Individuals Filing Separately Head of Household
10% $11,000 or less $0 to $22,000 $11,000 or less $0 to $15,700
12% $11,000 to $44,725 $22,000 to $89,450 $11,000 to $44,725 $15,700 to $59,850
22% $44,725 to $95,375 $89,450 to $190,750 $44,725 to $95,375 $59,850 to $95,350
24% $95,375 to $182,100 $190,750 to $364,200 $95,375 to $182,100 $95,350 to $182,100
32% $182,100 to $231,250 $364,200 to $462,500 $182,100 to $231,250 $182,100 to $231,250
35% $231,250 to $578,125 $462,500 to $693,750 $231,250 to $346,875 $231,250 to $578,100
37% Over $578,125 Over $693,750 Over $346,875 Over $578,100
Source: Internal Revenue Service

A single individual who earns $62,000 in 2023 will be taxed as follows: 10% on the first $11,000; 12% on the next $33,725 (the amount over $11,000 up to $44,725); then 22% on the remaining $17,275 (the amount over $44,725 up to $95,375), all of which equals $8,947.50.

Another individual who earns $160,000 will be taxed 10% on the first $11,000; 12% on the next $33,725; 22% on the next $50,650 (the amount over $44,725 up to $95,375); then 24% on the remaining $64,625 (the amount of income that falls between $95,375 and $182,100), all of which equals $31,800.

Following this example, the single taxpayer who falls under the third marginal tax bracket will pay less tax than the single filer who falls in the fourth and higher bracket.

A marginal tax rate means that different portions of income are taxed at progressively higher rates.

Although these taxpayers fall in the third and fourth marginal brackets, they do not pay flat rates of 22% and 24%, respectively, on all of their income due to the nature of the marginal tax calculation. If they did, the first individual would pay 22% x $62,000 = $13,640; and the second will pay 24% x $160,000 = $38,400. In total, individual A pays an effective rate of 14.4% ($8,947.50 ÷ $62,000) and the individual with the higher income pays a rate of 19.9% ($31,800 ÷ $160,000). These rates are called effective tax rates and represent the actual percentage at which the tax is levied during a tax year.

Sales and Capital Gains Tax Rates

Tax rates don’t only apply to earned income and corporate profits. Tax rates can also apply on other occasions when taxes are imposed, including sales tax on goods and services, real property tax, short-term capital gains tax, and long-term capital gains tax. When a consumer purchases certain goods and services from a retailer, a sales tax is applied to the sales price of the commodity at the point of sale. Since sales tax is governed by individual state governments, the sales tax rate will vary from state to state. For example, the state sales tax rate in Georgia is 4%, while the tax rate in California is 7.25%.

Since additional income gained from investments is categorized as earnings, the government also applies tax rates on capital gains and dividends. When the value of an investment rises and the security is sold for a profit, the tax rate that the investor pays depends on how long s/he held the asset. The tax rate on the capital gain of a short-term investment (an investment held for one year or less) is equal to the investor’s ordinary income tax. So, an individual who falls into the 22% marginal tax bracket will pay 22% on his or her short-term capital gains.

The tax rate on profits from investments held longer than a year ranges from 0% to 20%. For the taxable year 2023, individuals with taxable income below $44,625 pay 0%. Individuals with taxable income between $44,625 and $492,300 pay 15%, and investors with income above $492,300 pay a 20% tax rate on capital gains.

Qualified dividends are subject to the same tax rate schedule that applies to long-term capital gains. Non-qualified dividends have the same tax rates as short-term capital gains.

Tax Rates Abroad

Tax rates vary from country to country. Some countries implement a progressive tax system, while others use regressive or proportional tax rates. A regressive tax schedule is one in which the tax rate increases as the taxable amount decreases.

The proportional or flat tax rate system applies the same tax rates to all taxable amounts, that is irrespective of income level. Bolivia and Greenland are examples of countries that have this system of taxes in place.

Article Sources
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  1. The Tax Foundation. "Progressive Tax."

  2. Internal Revenue Service. "Rev. Proc. 2021-45," Pages 5-8.

  3. Internal Revenue Service. "Rev. Proc. 2022-38," Pages 5-7.

  4. California Department of Tax and Fee Administration. "Know Your Sales and Use Tax Rate."

  5. Georgia Department of Revenue. "Sales Tax Rates: General," Download PDF.

  6. Internal Revenue Service. "Topic No. 409: Capital Gains and Losses."

  7. Internal Revenue Service. "Rev. Proc. 2022-38," Pages 8-9.

  8. Internal Revenue Service. "Topic No. 404 Dividends."

  9. PricewaterhouseCoopers. "Greenland Individual—Taxes on Personal Income."

  10. PricewaterhouseCoopers. "Bolivia: Individual Taxes on Personal Income."

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