From the course: Finance Foundations: Income Taxes

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Average and marginal tax rates

Average and marginal tax rates

From the course: Finance Foundations: Income Taxes

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Average and marginal tax rates

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- Remember that under my simple tax system, if you make $100, you pay $25 of tax. you pay $25 of tax. The first $50 is not taxed. The second $50 is taxed at the rate of 50%, at the rate of 50%. so you'll pay a total of $25 tax if your taxable income is $100. This allows us to discuss two important concepts, the average tax rate and the marginal tax rate. The average tax rate is simply the tax that you owe, $25 in this case, divided by how much you made, $100 in this case. a hundred dollars in this case. $25 divided by $100 is 25%. Twenty-five dollars dividedby a hundred dollars is 25%. That's the average tax rate. This is a very simple, intuitive idea. For example, the average federal tax rate for all taxpayers in the United States is between 10% and 15%. Now, note, before you get excited about this relatively low rate, remember that this doesn't include state income tax, sales tax, property tax, social security tax. Economists say that a more important rate than the average tax rate…

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