question: How and why do the marginal and effective tax rates differ?
I’m going to answer this one on here since it seems a little heavy for my blog right now but I don’t want to make you wait, anon.
So, the difference between marginal tax rate and effective tax rate can be confusing but it’s not all that hard to understand if it’s explained the right way.
The marginal tax rate refers to the tax brackets: 10, 15, 25% etc.. Your Adjusted Gross Income (AGI) is the number that determines your tax bracket. It is always the last number on page 1 and the first number on page 2 of the Form 1040. For example (using 2016 tax bracket), if your AGI is $50,000, you fall into the 25% tax bracket. If you’re filing status is Single, then that means that the first $9,275 of your AGI is taxed at 10%, the next $28,375 is taxed at 15% (because the 15% bracket is between $9,275 and $37,650), and the remaining $12,350 (50,000-37,650) is taxed at 25%. So, your marginal tax rate is 25%.
Also using the information above, you can find the effective tax rate. That number is the tax you pay divided by your total AGI. So, using exact numbers from above, the taxpayer making $50,000 would pay a rounded tax of $8,271 ((9,275x10%) + (28,375x15%) + (12,350x25%)). And using this number, we can calculate that the effective tax rate is 16.54% (8,271/50,000).
So, to try and simplify this complicated subject, the marginal rate is the tax bracket that your AGI falls into, and the effective rate is the percentage of tax you paid based on your total AGI.
As for the why? Who really knows. There’s so much in tax that makes no sense and there’s not always a reason. It’s just what the tax law writers came up with in order to make things how they needed them. It’s just one of those things in life you accept and don’t question.
I hope this helped, anon. =)
Site for 2016 tax brackets: http://taxfoundation.org/article/2016-tax-brackets










