Marginal Tax Rate vs Tax Bracket
Marginal Tax Rate and Tax Bracket are two Public Finance & Taxation concepts in AP Economics that students often mix up. In short: marginal tax rate is the marginal tax rate is the tax rate applied to the next dollar of income earned. Meanwhile, tax bracket is a tax bracket is a range of income taxed at a particular rate within a progressive income-tax system. Here is how they compare side by side.
The marginal tax rate is the tax rate applied to the next dollar of income earned.
In a progressive system it is the rate of your top bracket. It drives incentives to work and invest because it determines how much of additional income you keep. It is usually higher than the average tax rate.
A tax bracket is a range of income taxed at a particular rate within a progressive income-tax system.
As income rises into higher brackets, only the income within each bracket is taxed at that bracket's rate, not all income. This is why moving into a higher bracket never lowers your after-tax income.
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