Policy Basics: Marginal and Average Tax Rates
Misunderstandings about two different types of tax rates often create confusion in discussions about taxes. A taxpayer’s average tax rate (or effective tax rate) is the share of income that they pay in taxes. By contrast, a taxpayer’s marginal tax rate is the tax rate imposed on their last dollar of income.
Taxpayers’ average tax rates are lower — usually much lower — than their marginal rates. People who confuse the two can end up thinking that taxes are much higher than they actually are.