The Opacity of Marginal Tax Rates

Reprinted with permission of Tax Analysts.

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Abstract

Suppose that a taxpayer earns an additional dollar of income. How much tax would she owe on that dollar? A natural way to answer this question would be to look up the taxpayer's statutory tax rate - the tax rate corresponding to her tax bracket and filing status.

Introduction

But that approach would yield the wrong answer for half of all taxpayers in 2009. The actual tax rate on an extra dollar of earnings - the effective marginal tax rate (EMTR) - is higher than the statutory marginal tax rate (SMTR) for 32 percent of taxpayers and lower than the SMTR for almost 18 percent of taxpayers. The discrepancy is especially striking for taxpayers subject to the alternative minimum tax - more than 80 percent face an EMTR above their SMTR. Moreover, the two rates can differ a lot.

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