What is the difference between marginal rate of tax and average rate of tax?

Question

What is the difference between marginal rate of tax and average rate of tax?

Answer 1

Marginal is what is paid on the last dollars earned, average is the actual tax on the whole income.

They are different in progressive or regressive tax systems and the same when a flat tax rate is used.

  To make a simple example, suppose the progressive tax rate was

10% on the first $10,000

20% on the amount over $10,000 up to $30,000

30% over $30,000

A person who had earned $25,000 so far will pay a marginal tax rate of 20% of each dollar added to earnings.  But since they pay only 10% on the first $10,000 ($1,000 in taxes) and 20% on the $15,000 remaining ($3,000 in taxes), their total taxes are $4,000, giving an average tax rate of 4/25 or 16%.