From the course: Accounting Foundations
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Average and marginal tax rates
From the course: Accounting Foundations
Average and marginal tax rates
- Remember that under my simple tax system, if you make $100, you pay tax of $10. The first $50 is not taxed. The second $50 is taxed at the rate of 20%. So you will pay a total of $10 tax if your taxable income is $100. Now, this allows us to discuss two important concepts, the average tax rate and the marginal tax rate. The average tax rate is simply the tax that you owe, $10 in this case, divided by how much you made, $100 in this case. $10 divided by $100 is 10%. That's the average tax rate. This is a very intuitive idea. For example, the average federal tax rate for all taxpayers in the United States is between 10% and 15%. Now, note, before you get excited about this relatively low rate, remember that that doesn't include state income tax, sales tax, property tax and Social Security tax. Now, economists say that a more important rate than the average tax rate is the marginal tax rate. The marginal tax rate is the rate you will pay on the next dollar of income that you make. The…
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