Which tax rate is applied to incremental income?

Which tax rate is applied to incremental income?

• A. Effective Tax Rate
• B. Average Tax Rate
• C. Marginal Tax Rate
• D. Proportional Tax Rate

Answer: (C)

Incremental income is taxed at the marginal tax rate—the rate applied to the next dollar you earn. In a progressive system, tax brackets determine how much tax increases with a small rise in income, so the tax on that additional dollar is governed by the current bracket it falls into. This is different from the overall burden shown by the effective rate (total tax divided by total income) or the average rate, and it’s not describing a flat, all-income rate as a proportional tax would. For example, if you’re near the top of a bracket and earn a bit more, that extra income is taxed at the higher marginal rate, which is exactly what the term captures.

Incremental income is taxed at the marginal tax rate—the rate applied to the next dollar you earn. In a progressive system, tax brackets determine how much tax increases with a small rise in income, so the tax on that additional dollar is governed by the current bracket it falls into. This is different from the overall burden shown by the effective rate (total tax divided by total income) or the average rate, and it’s not describing a flat, all-income rate as a proportional tax would. For example, if you’re near the top of a bracket and earn a bit more, that extra income is taxed at the higher marginal rate, which is exactly what the term captures.