What is the Marginal Tax Rate (MTR)?
The Marginal Tax Rate (MTR) is the rate of tax income earners incur on each additional dollar of income. As the marginal tax rate increases, the taxpayer finishes up with less money per dollar retained on previously earned dollars. The tax systems in the US employing marginal tax rates applies different tax rates to different levels of income. And as income rises, it is taxed at a higher rate.
Flat Rate Tax System
The other tax system used in modern economics is flat taxes, the rate does not change. This is regardless of the individual’s income, no matter how much a person makes. The earned income Marginal Tax Rate (MTR) will be taxed at the same percentage. Supporters of flat-rate taxes argue that this system is fair because it taxes all individuals and businesses at the same rate. So, flat-rate tax systems usually do not allow deductions, which is often associated with countries that have a rising economy.
Marginal Tax Rate (MTR) Chart – Example
| Taxable Income | Marginal Tax Rate |
| Less than $20,000 | 10% |
| Between $20,000–$40,000 | 20% |
| Between $40,000–$60,000 | 30% |
| Between $60,000–$100,000 | 40% |
| Over $100,000 | 50% |
The above is a clear example of a Marginal Tax Rate (MTR) schedule, and it explains the rate at which various levels of income are taxed. Therefore, as income rises, each dollar of income above the previous level is taxed at a higher rate. If a taxpayer earns more money, the marginal tax rates can significantly diminish the benefit of the additional income. This is because it will be taxed at a higher rate, and as a result, marginal tax rates are harmful. They discourage people from working harder to earn more money as earning more may increase the tax rate. A larger income will still be taxed at more than one level.
The table below illustrates how does the marginal tax rate work:
| Earned Income Levels | Marginal Tax Rate | Amount Taxable at Marginal Tax Rate Level | Amount of Tax Owed |
| Less than $20,000 | 10% | $20,000 | $2,000 |
| Between $20,000–$40,000 | 20% | $20,000 | $4,000 |
| Between $40,000–$60,000 | 30% | $20,000 | $6000 |
| Between $60,000–$100,000 | 40% | $40,000 | $16,000 |
| Over $100,000 | 50% | $20,000 | $10,000 |
| Total | $120,000 | $38,000 |
As the table above shows, it may be best to think in terms of income growing from $0 to $120,000. As it moves toward $120,000, it incurs different tax rates, therefore, income between $0 and $20,000 is taxed at 10%. So the tax owed is $2,000 ($20,000 x 10%). Then income moves into a new marginal tax rate 20%. As it grows above $20,000, the $120,000 income earner owes $4,000 in tax ($20,000 x 20%), in addition to the $2,000 of tax incurred on the first $20,000 for this portion of income. This is done at each income level as it goes up to the taxpayer’s total income, $120,000. Based on the tax rate schedule above, the $120,000 income earner pays a total of $38,000 in taxes based on the MTR system.
