Marginal versus Effective Personal Income Tax Rates

A great deal of confusion abounds in discussions about state personal income tax rates and how they apply to income. This policy basic clarifies the difference between marginal and effective tax rates, and gives a North Carolina-specific example of how these rates work in action.

A taxpayer’s marginal tax rate is the tax rate imposed on his or her last dollar of income. In a progressive personal income tax system, the tax rate applied to higher levels of income is higher than the rate applied to lower levels of income. Such a graduated rate structure is better able to keep up with a growing economy and ensure that those at the bottom of the income distribution don’t have to carry a heavier tax load than the wealthy.