What Is the Marginal Tax Rate System?

The marginal tax rate is the rate of tax income earners incur on each additional dollar of income. As the marginal tax rate increases, the taxpayer ends up with less money per dollar earned than he or she had retained on previously earned dollars. Tax systems employing marginal tax rates apply different tax rates to different levels of income; as income rises, it is taxed at a higher rate. It is important to note, however, the income is not all taxed at one rate but rather many rates as it moves across the marginal tax rate schedule.

The goal of the marginal rate is to place the burden of supporting the government on the shoulders of taxpayers more financially able to do so versus spreading the burden evenly to the detriment of taxpayers not able to afford anymore, while attempting to balance the problems of a straight progressive rate.

Key Takeaways The marginal tax rate is the rate of tax income earners incur on each additional dollar of income.

The other tax system used in modern economics is flat taxes, in which the rate does not change, regardless of the individual's income.

Although earning more money may increase the income tax rate, a larger income will still be taxed at more than one level.

Flat Tax System

The other tax system used in modern economics is flat taxes. With flat taxes, the rate does not change, regardless of the individual's income. No matter how much a person makes, he or she will be taxed at the same percentage. Supporters of flat taxes argue that this system is fair because it taxes all individuals and businesses at the same rate, rather than taking into account the levels of their income. Flat tax systems usually do not allow deductions. This form of taxation is often associated with countries that have a rising economy, but there is little evidence to support flat tax as the sole cause of growth.﻿﻿