The Difference Between Average and Marginal Tax Rates

The United States individual income tax system is a progressive tax system. This means that households with higher incomes pay a higher percentage in tax. Marginal income tax rates range from 0% to 39.6%. The 2017 brackets for individuals and married couples are as follows:

When Your Taxable Income Is Over: Your Marginal Tax Rate When You are Single Is: When Your Taxable Income Is Over: Your Marginal Tax Rate When You are Married and Filing Jointly Is:
$0 10% $0 10%
9,325 15% 18,650 15%
37,950 25% 75,900 25%
91,900 28% 153,100 28%
191,650 33% 233,350 33%
416,700 35% 416,700 35%
418,400 39.6% 470,700 39.6%

Taxable income is gross (total) income minus deductions. People can take a standard deduction, or if the amount of other deductions is greater, they can deduct expenses such as charitable donations, interest on mortgages and home equity loans, certain health expenses, etc.  The standard 2017 deduction for singles is $6,350 and for married filing jointly is $12,700.
Source: Internal Revenue Service (

An individual who earns, for example, $100,000 is in the 28% marginal tax bracket. However, this person still only pays 10% over the first $9,325 earned; 15% over the amount in the next bracket, etc.

To illustrate the total amount of tax paid and the difference between average and marginal tax rates, consider the following three individuals filing as a single person:

Individual 1
This person has taxable income of $6,000. Her marginal tax rate is 10%, and the total amount of tax paid equals $6,000 times 10%, or $600. The average tax is the total amount of tax paid divided by the total income. This equals $600 divided by $6,000, or .10, or 10%. This person’s average and marginal tax rates are the same.

Individual 2
This person has a taxable income of $25,000. His marginal tax rate is 15%. However, he pays only 10% over the first $9,325. Then he pays 15% over the remaining $15,675. The total tax equals:
(.10 x $9,325) + (.15 x $15,675) = $932.50 + $2,351.25 = $3,283.75. So his average tax rate is $3,288.75 divided by $25,000, or .13135, or 13.135%. Thus, his average tax rate (13.135%) is lower than his marginal tax rate (15%).

Individual 3
Let’s say that this person has a taxable income of $100,000. Her marginal tax rate is 28%. She pays 10% over the first $9,325. Then she pays 15% over the amount in the next bracket ($28,625), 25% over the amount in the following bracket ($53,950), and 28% of the remaining amount ($8,100). This person’s total tax equals:
(.10 x $9,325) + (.15 x $28,625) + (.25 x $53,950) + (.28 x $8,100) = $932.50 + $4,293.75 + $13,487.50 + $2,268 = $20,981.75. So her average tax rate is $20,981.75 divided by $100,000, which equals .2098, or 20.98%. Thus, her average tax rate (2.98%) is lower than her marginal tax rate (28%).

In general, for every person in the 15% or higher marginal tax bracket, the marginal tax rate is higher than the average tax rate (in a progressive tax system).

Tax Deductions

Our current federal, state and local income tax systems allow households to deduct a variety of expenses from their gross income. Gross income minus tax deductions equals taxable income. For example, the mortgage interest a person pays each year on her/his house is deductible. Other deductions include state and local taxes, real estate taxes and loan points, certain retirement contributions, capital gains losses, health care expenses, dependent care expenses, self-employment expenses, and charitable expenses. If the person’s income is $100,000, and has $40,000 in deductible expenses, then her/his taxable income (adjusted gross income, or AGI) is $60,000. Because of deductions, this person will only have to pay taxes on $60,000, instead of on $100,000.

Tax Systems

The Federal individual income tax system described above is an example of a progressive tax. Taxes can also be proportional or regressive. These systems are explained below.

1. Progressive tax.

In a progressive tax system, higher income earners pay a higher marginal tax rate than lower income earners. In the table at the top of this page, federal marginal tax rates range from 10% to 39.6%. For example, a single individual who earns $20,000 in taxable income is in the 15% tax bracket. This means that each additional dollar earned by this person (until he reaches the next higher bracket) is subject to a 15% federal tax.


From the examples above we can see that it does not mean that (s)he pays 15% of her/his total income in taxes. The first $9,325 is subject to only 10%. The remaining amount up to $20,000 is subject to 15%.

2. Proportional tax.
In a proportional tax system, high- and low-income earners pay the same tax rate. Most United States state and local individual income tax systems are proportional. For example, a person who earns $10,000 pays 5% in state income taxes, and a person who earns $500,000 also pays 5%. Some economists support a proportional, or flat tax for our federal income tax system. Most flat tax proposals do not allow many deductions, except for an exemption to pay any tax for lower income households. Therefore, it is very simple.

In the United States, everyone pays the same percentage of Social Security tax up to a certain threshold level ($110,000 in 2012). Up to this threshold, the Social Security tax is proportional. After the threshold, it becomes regressive, because an income earner pays 0% in Social Security tax on income of more than $110,000.

3. Regressive tax

In a regressive tax system, low-income earners pay a higher rate than higher-income earners. For example, a person who earns $10,000 pays 20% in tax, and a person who earns $100,000 pays 10%. Most state sales tax systems are regressive. Lower income households usually spend their entire income on consumer products. Therefore, if all products are subject to a sales tax of 5%, then they pay 5% of their income on sales tax. Higher income households usually spend only a portion of their income on consumer products. Therefore, as a percentage of their income, they pay less than 5%. Some states try to avoid the regressive nature of the sales tax by exempting essential consumer products such as food and clothing.

The Alternative Minimum Tax

If a person applies a large number of deductions, so that the total amount of taxes falls below a certain level, then (s)he may be subject to the alternative minimum tax. The alternative minimum tax was passed in the United States to ensure that everyone pays at least some minimum amount of tax.

Other Common Taxes

In addition to the various taxes mentioned in the examples above, there are numerous other taxes. Corporations pay income taxes. Most local governments collect property taxes. There are also various other federal taxes, including excise taxes, capital gains taxes, and estate taxes. An excise tax is similar to a sales tax, but it is usually levied by the federal government on products such as tobacco, cigarettes, spray cans, and gasoline. A capital gains tax is a tax paid over an asset, which has gained value. For example, if someone purchases stock worth $10,000 on January 1, and then sells the same stock for $14,000 two years later, the $4,000 in gained income is subject to a capital gains tax. Estate taxes are paid when someone dies and leaves a valuable estate. The heirs will have to pay an estate tax if the value of the estate exceeds a certain amount.