How to Calculate a Marginal Tax Rate
The marginal tax rate equals the change in tax paid divided by the change in income, times 100; it is the rate charged on the next dollar earned.
The Marginal Tax Rate formula
Calculator
Enter income and tax paid before and after a raise to get the rate charged on the extra income.
The lower of the two income levels.
Apply the bracket schedule slice by slice: 2,000 + 8,000 + 3,000 = 13,000.
The higher of the two income levels.
Same schedule at the higher income: 2,000 + 8,000 + 6,000 = 16,000.
Of the $10,000 raise, $3,000 goes in tax, so the next dollar is taxed at 30%.
- Extra income
- $10,000
- Extra tax paid
- $3,000
- Extra income kept
- $7,000
- Average rate at the higher income
- 20%
- Tax structure
- Progressive
The change in income between the two levels, which is the denominator.
The change in total tax between the two levels, which is the numerator.
What the worker actually takes home from the raise, which is what drives the incentive to work more.
Total tax divided by total income at the higher level. Lower brackets pull it below the marginal rate.
A marginal rate above the average rate pulls the average up as income rises, which is what progressive means.
How to calculate Marginal Tax Rate, step by step
- 1Take the two income levels. Note income before the raise and income after it, or read the two rows the table hands you.
- 2Compute total tax at each level. Apply the bracket schedule slice by slice at both income levels and write down both totals.
- 3Divide the change in tax by the change in income. Marginal rate = (tax₂ − tax₁) ÷ (income₂ − income₁), then multiply by 100 to state it as a percent.
- 4Compare it to the average rate. A marginal rate above the average rate means the tax is progressive, below means regressive, and equal means proportional.
Worked example: Marginal Tax Rate
Use an illustrative schedule: 10% on the first $20,000, 20% from $20,000 to $60,000, and 30% above $60,000. Income rises from $70,000 to $80,000. Tax at $70,000 = 2,000 + 8,000 + (30% × $10,000 = 3,000) = $13,000. Tax at $80,000 = 2,000 + 8,000 + (30% × $20,000 = 6,000) = $16,000. Marginal rate = (16,000 − 13,000) ÷ (80,000 − 70,000) = 3,000 ÷ 10,000 = 30%. The average rate at $80,000 is 16,000 ÷ 80,000 = 20%, so marginal (30%) sits above average (20%) and the tax is progressive.
Marginal Tax Rate questions
Does moving into a higher bracket tax all of your income at that rate?
No, only the income inside the new bracket is taxed at the higher rate, and every dollar below it stays at the lower rates. That is exactly why the average rate stays under the marginal rate.
How do these two rates tell you if a tax is progressive?
A tax is progressive when the marginal rate is above the average rate, so the average rises as income rises. When the marginal rate sits below the average, the tax is regressive.
Why do economists care about the marginal rate?
Because decisions are made at the margin: the marginal rate is what a worker keeps or loses on the next hour of work. It drives the incentive to work, save, and invest more than the average rate does.
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