The rate at which income over a certain amount is taxed. Although in general, graduated income taxes impose higher tax rates on higher incomes, the tax rate does not rise for each additional dollar earned. Rather, it rises by income brackets, and each tax rate applies only to income that falls in that bracket. For example, in 2002, the highest marginal federal tax rate was 38.5 percent, which for single taxpayers was imposed on income in excess of $54,000.
Marginal Tax Rate
The amount of tax paid on an additional dollar of income. As income rises, so does the tax rate.
Investopedia Commentary
Many believe this discourages business investment because you are taking away the incentive to work harder.
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See also: Income, Income Tax, Internal Revenue Service - IRS, Tax Bracket, Tax Shield
marginal tax rate
How to calculate your marginal tax rate and how to use that rate for making sound investment decisions. Taxes are determined by calculations based on taxable income. Tax rates (or brackets) start at 10%, rising as high as 39.1% currently. Taxable income is broken down into certain levels, each to which a tax bracket applies. The highest bracket relative to taxable income is called your marginal tax rate. Each additional dollar of income or deduction increases or reduces tax by the percentage determined to be your marginal tax bracket. Use the calculations in investment decisions by comparing aftertax returns to tax-free securities or to growth securities that might be held until retirement, when tax brackets may be lower.Jeffrey S. Levine, CPA, MST, Alkon & Levine, PC, Newton, MA |