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What are effective tax rates, marginal tax rates?

Measuring taxes is a complicated matter thanks to loopholes, deductions, passive income and many other factors. (Source: Pixabay) Measuring taxes is a complicated matter thanks to loopholes, deductions, passive income and many other factors. (Source: Pixabay)
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(RNN) – There are two popular ways to describe tax rates for individuals in the U.S.

An effective tax rate is an expression of how much of an individual’s income goes to federal taxes.

It is often arranged by income rates and expressed as a percentage. For example, those who made between $40,000 and $50,000 in 2015 paid an average of 8.8 percent of their income in federal taxes.

It is juxtaposed with marginal tax rates.

Marginal tax rates are a set of progressive tax brackets in which individuals are taxed at larger percentages as they earn more money. There are seven brackets.

  • 10 percent: $0 to $9,275
  • 15 percent: $9,275 to $37,650
  • 25 percent: $37,650 to $91,150
  • 28 percent: $91,150 to $190,150
  • 33 percent: $190,150 to $413,350
  • 35 percent: $413,350 to $415,050
  • 39.6 percent: More than $415,050

These rates, however, are not representative of what is actually paid to the federal government by taxpayers. Deductions, exemptions, credits and the percentage of an individual’s income that is passive make the final percentage different than the marginal rate.

The effective tax rate, which is an average, is a more accurate representation of what individuals pay in taxes. As seen below, taxpayers at all income levels pay on average less than the actual marginal rate. High income earners have received some criticism for not paying a "fair share" of taxes, but they still on average pay a higher percentage of their income in federal taxes than those with lower incomes.

However, some "superwealthy" individuals may be exceptions. For instance, the top .01 percent of earners pay a lower percentage than the top 1 percent.

Also, some state tax rates may be considered regressive, but the federal tax rates are the largest burden on taxpayers.

The same approach can be applied to corporations. What businesses actually pay in taxes was a hot topic on the campaign trail in 2016.

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