The Concise Encyclopedia of Economics
FEATURED ARTICLE

Marginal Tax Rates

Alan Reynolds

The marginal tax rate is the rate on the last dollar of income earned. This is very different from the average tax rate, which is the total tax paid as a percentage of total income earned. In 2003, for example, the United States imposed a 35 percent tax on every dollar of taxable income above $155,975 earned by a married taxpayer filing separately. But that tax bracket applied only to earnings above that $155,975 threshold; income below that cutoff point would still be taxed at rates of 10 percent on the first $7,000, 15 percent on the next $14,400, and so on. Depending on deductions, a taxpayer might pay a relatively modest average tax on total earnings, yet nonetheless face a 28-35 percent marginal tax on any activities that could push income higher--such as extra effort, education, entrepreneurship, or investment. Marginal decisions (such as extra effort or investment) depend mainly on marginal incentives (extra income, after taxes)....

READ MORE
ALSO OF INTEREST

Immigration

George J. Borjas

Public Choice

William F. Shughart II

Return to top
FEATURED BIOGRAPHY

James J. Heckman

(1944-)

In 2000, James Heckman, along with Daniel McFadden, received the Nobel Prize in economics. Heckman won the prize for "his development of theory and methods for analyzing selective samples," highly technical work that it is difficult to explain to the layman. Nevertheless, the work rewarded by the Nobel committee has been valuable for economists' studies of many issues that laymen do care about.... An economist who wants to know, for example, how male workers will respond to a higher wage rate can take microdata on wages and hours worked and find a relationship. This approach has a problem that economists have long recognized: some men will not work at all and, therefore, will not be in the data set. And, presumably, these men who do not work will be disproportionately from the group that, had they worked, would have earned low wages. They have "self-selected" out of the workforce. So the economist's estimates on the effect of wages on hours worked will be biased. How is the economist to deal with this fact if he wants to generalize from his sample to the male population in general?

... Heckman came up with a clever econometric approach to figuring out how to correct for this self-selection problem....

READ MORE