Effective Tax Rate vs. Marginal Rate

Your marginal tax rate is the rate applied to your last dollar of income — the bracket you're currently sitting in. Your effective tax rate is different: it's your total tax bill divided by your total income, which gives you the average rate you actually paid across every dollar you earned.

Because a progressive system taxes lower slices of income at lower rates, your effective rate is always lower than or equal to your marginal rate, unless there's only one bracket in play. Using the worker from the last lesson, who earned $105,000 and paid $25,850 in total tax, their marginal rate is 37%, but their effective rate is much lower.

Income: $105,000
Total tax: $25,850
Marginal rate: 37%  (the rate on the last dollar earned)

Effective rate = total tax / total income
              = $25,850 / $105,000
              = about 24.6%

Your ____ tax rate is your total tax bill divided by your total income.

Why is the effective tax rate almost always lower than the marginal tax rate in a progressive system?

Someone's marginal tax rate and effective tax rate are usually the exact same number under a progressive system.

This distinction matters for how you think about your own finances: your marginal rate is the right number to use when estimating the tax impact of one more dollar of income (like a raise or bonus), while your effective rate is the right number to use when thinking about your overall tax burden as a share of everything you earned.