Marginal tax rate - Definition and Overview

In the tax system and in economics, the marginal tax rate refers to the increase in one's tax obligation as one's taxable income rises:

marginal tax rate = Δ(tax obligation)/Δ(taxable income)

This can be measured either by looking at the published tax tables (to get the official marginal tax rate) or by looking at actual practice, i.e., how an increase in income raises tax obligations either within "brackets" or between them, including all types of taxes or just some of them. It may be calculated noting how tax changes with changes in pre-tax income, rather than with taxable income.

Marginal tax rates do not fully describe the impact of taxation. A flat rate poll tax has marginal rate of zero, while a discontinuity in tax paid can lead to positively or negatively infinite marginal rates at particular points.

Where social security and other benefits are related to income, the combined tax and benefit effect can also be taken into account giving a result sometimes described as the marginal effective tax rate or the marginal deduction rate. If the marginal deduction rate exceeds 100%, then an increase in gross income leads to a decrease in disposable income, discouraging attempts to increase income; when this occurs for low income individuals, it is known as the "poverty trap".

Example Usage of Marginal