# Marginal Tax Rate: What It Is and How to Determine It, With Examples

![Marginal Tax Rate](https://www.investopedia.com/thmb/VE948Csy91BHqU64K-pPjmbLsc8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Marginal_Tax_Rate_Final-7cae08bcc3934971b56e7650050f99f1.jpg)

*— Investopedia / Candra Huff*

> **Definition**
>
> A marginal tax rate is the percentage of tax applied to each additional dollar of income within a specific bracket, rather than being applied to the whole income.

Marginal tax rates are the percentage of tax applied to each extra dollar of income as a taxpayer moves through different [tax brackets](https://www.investopedia.com/terms/t/taxbracket.asp).

In other words, it represents the percentage taken from your next dollar of income above your current income level. So, if you're in the 24% tax bracket, each additional dollar you earn will be taxed at 24 cents until you reach the next bracket threshold. If you get a raise that pushes part of your income into a higher bracket, only the portion of your income earned above that threshold gets taxed at the higher rate, not your entire income. 

This is meant to create a more equitable distribution of the tax burden across different [income levels](https://www.investopedia.com/terms/h/household_income.asp).

### Key Takeaways

*   Marginal taxation is the percentage of tax paid on each additional dollar of income within a specific tax bracket, rather than on total income.
*   Marginal tax rates only apply to the portion of income within each bracket, not your entire income.
*   Moving into a higher bracket doesn't mean all your money is taxed at that rate, as many in the public presume—only the amounts within that next bracket are taxed at that rate.
*   Thus, your effective tax rate (what you pay overall) is always lower than your highest marginal tax rate.

## What Are Marginal Tax Rates?

Marginal tax rates emerged in the early 20th century as the government sought ways to fund public services while maintaining economic fairness. The U.S. first implemented a progressive income tax system in 1862 to fund the Civil War, but the modern framework took shape with the 16th Amendment in 1913. The amendment gave the federal government the constitutional authority to collect income taxes.

Marginal tax rates work by dividing taxable income into segments known as "brackets," with amounts earned within each bracket subject to a different tax rate. As income increases and moves into higher brackets, only the portion of income within a particular bracket is taxed at that bracket's rate. This creates a stepped increase in tax liability, where taxpayers gradually pay more as their income rises, rather than facing sudden jumps in their total tax bill when they move up a bracket. For instance, moving from a 22% to a 24% bracket doesn't mean all income is suddenly taxed at 24%-only those dollars earned above the threshold face the higher rate. 

The system's [progressive nature](https://www.investopedia.com/terms/p/progressivetax.asp) means that even high-income earners will pay lower rates on their first dollars of income.

> **Tip**
>
> Marginal taxation reflects the principle that taxpayers should contribute according to their ability to pay while ensuring that moving into a higher tax bracket doesn't result in a lower overall take-home pay. This is a common misconception about how marginal rates work.

## Marginal Tax vs. Flat Tax

While most developed nations now use marginal tax rates, some countries have a [flat tax](https://www.investopedia.com/terms/f/flattax.asp) system where all income is taxed at the same rate, regardless of a person's earnings. Proponents of flat taxes argue they simplify tax administration and may encourage economic growth, while those who oppose them argue that they unfairly favor wealthy individuals.

> **Fast Fact**
>
> Most countries that use a flat tax rate do not allow tax deductions.

## Example of Determining Marginal Tax Rates

Let's look at how marginal tax rates apply to someone earning $195,000 in taxable income in 2025, using the IRS tax brackets for a single filer (see the table above).

The total tax liability is $39,647.00. The [effective tax rate](https://www.investopedia.com/terms/e/effectivetaxrate.asp) (total tax due divided by total income) comes to about (39,647/195,000) x 100 = 20.3%, despite the taxpayer's income approaching the 32% bracket threshold.

This demonstrates how the progressive system ensures that not all income is taxed at the highest marginal rate, making the taxes owed more moderate than many people assume.

For comparison, if this were a flat tax system at 24% (the taxpayer's highest marginal rate), the total tax would be $195,000 x 0.24 = $46,800. That's about $7,150 more than under the progressive system.

> **Important**
>
> Real-world tax calculations would first subtract the standard deduction, as well as any other applicable deductions, credits, or adjustments from gross income. Therefore, someone with $195,000 in gross income would very likely have a lower taxable income and ultimate tax liability than shown here.

## The Bottom Line

Marginal tax rates form the backbone of today's progressive taxation systems, which are used in many nations worldwide. It's a system meant to ensure that moving into a higher tax bracket only affects the portion of income above the bracket threshold and not all earnings.

For taxpayers, understanding their marginal tax rate can help with more effective tax planning, investment strategies, and other financial decisions.

> **Article Sources**
>
> 1.  Elaine M. Maag, via Urban Institute. "[A Brief History of Marginal Tax Rates](https://www.urban.org/sites/default/files/publication/58691/1000559-A-Brief-History-of-Marginal-Tax-Rates.PDF)."
>     
> 2.  U.S. National Archives. "[16th Amendment to the U.S. Constitution: Federal Income Tax (1913)](https://www.archives.gov/milestone-documents/16th-amendment)."
>     
> 3.  Hill, J. A. "[The Civil War Income Tax](https://www.jstor.org/stable/pdf/1885003.pdf)." _Quarterly Journal of Economics_, vol. 8, no. 4, 1984, pp. 416-452.
>     
> 4.  Tax Foundation. "[Marginal Tax Rate](https://taxfoundation.org/taxedu/glossary/marginal-tax-rate/)."
>     
> 5.  Brookings Institute. "[Flat Tax Impact on Saving and the Economy](https://www.brookings.edu/articles/flat-tax-impact-on-saving-and-the-economy/)."