Marginal Tax Rate

The marginal tax rate is the percentage of an extra unit of income that is paid in tax. If a person's next $100 of earnings would raise their tax bill by $30, their marginal tax rate is 30%. In a system of tax brackets, it is usually the rate of the highest bracket that a person's income reaches.

It is different from the average, or effective, tax rate, which is total tax divided by total income. Under a progressive tax the marginal rate is higher than the average rate, because lower slices of income are taxed at lower rates. Economists focus on marginal rates because they shape decisions at the edge: whether to work extra hours, take a promotion, sell an asset or claim a deduction. The concept applies to income tax, payroll taxes and benefit withdrawal, and governments set it through the rate schedules in their tax laws.

Think of filling a set of buckets with water, one after another. The first bucket is free, the second has a small fee for each litre and the third a bigger fee. Whatever is poured next goes into the bucket currently being filled, so the fee that matters for the next litre is that bucket's fee, not an average of all of them.

A common worry is that moving into a higher tax band means paying the higher rate on all income. It does not. Only the income above the band's starting point is charged the higher rate, so a pay rise in a normal bracket system always leaves a person with more money after tax, not less.

The marginal tax rate is the change in tax divided by the change in income:

Here $\Delta T$ is the extra tax and $\Delta Y$ is the extra income. The average rate, for comparison, is $T/Y$.

Take a schedule where income up to $10,000 is untaxed, income from $10,000 to $50,000 is taxed at 20% and income above $50,000 at 40%. A worker earning $60,000 pays $0.2 \times 40{,}000 + 0.4 \times 10{,}000 = 12{,}000$. Their average rate is $12{,}000 \div 60{,}000 = 20\%$, but their marginal rate is 40%: a $1,000 bonus raises tax by $400 and leaves $600.

In the United States in 2026, federal brackets run from 10% to 37%, with the top rate applying above $640,600 of taxable income for a single filer. State income taxes and payroll taxes add to the combined marginal rate.

Statutory rates tell only part of the story. The effective marginal tax rate counts every way an extra unit of income reduces what a person keeps, including withdrawal of allowances and benefits:

• Allowance tapers. In the UK, the £12,570 personal allowance is reduced by £1 for every £2 of income above £100,000. Between £100,000 and £125,140, each extra £1 is taxed at 40% and also removes 50 pence of allowance, which is then taxed at 40%, giving an effective income tax rate of 60%.
• Benefit withdrawal. Means-tested welfare benefits are reduced as earnings rise. The UK's Universal Credit is withdrawn at 55 pence for each pound earned above a work allowance, on top of income tax and National Insurance, so some low-income workers keep less than a third of extra earnings.
• Phase-outs of credits. In the US, credits such as the earned income tax credit phase out as income rises, adding to marginal rates for some low and middle earners.

Very high effective rates at the bottom can create a poverty trap, where extra work barely raises living standards. Proposals for a negative income tax or a universal basic income are partly attempts to smooth these rates.

Marginal rates drive behaviour. A higher rate lowers the reward for an extra hour of labor, and through the substitution effect may lead people to work less, though an income effect can push the other way. It affects whether a second earner joins the workforce, compared with their reservation wage. Marginal rates also influence how people time asset sales under capital gains tax, whether income is labelled as salary, dividends or gains, and the incentive for tax avoidance.

When brackets are not adjusted for inflation, rising nominal wages push people into higher marginal bands, a process known as fiscal drag or bracket creep. The US indexes its brackets each year, while the UK froze its main thresholds until April 2031.

How high the top marginal rate should be is a long-running dispute. Advocates of supply-side economics argue that high top rates discourage work, investment and entrepreneurship and can reduce revenue, the reasoning behind the Laffer curve. Some economists, including Peter Diamond and Emmanuel Saez, have estimated revenue-maximizing top rates well above current levels, around 70% including all taxes, based on how much taxable income responds to rates. Others estimate a larger response and lower optimal rates. Evidence on the taxable income elasticity is mixed: much of the measured response at the top reflects shifting and timing of income rather than changes in real work.

• IRS: Federal income tax rates and brackets
• GOV.UK: Income over £100,000