[quote=EconProf]In discussing one’s “tax rate”, it is important to first define terms.
If you mean your income tax paid in one year relative to income for that year, that is called your average tax rate. I believe that is what most of the posters are referring to here.
But if you mean your tax bracket–the tax you paid on your last dollar earned–that is the marginal tax rate. It is far more important in decision-making…whether to take on extra income or not, whether to invest in tax-free municipal bonds or not, etc.
In a progressive tax system like ours, where your rate goes up as income increases, marginal rates will always exceed average rates.[/quote]
Yes – I’ve heard the term you used, average tax rate, also referred to as “effective” tax rate. My marginal tax rate is higher (25%). I will be hyper aware of where I fall in the marginal rate when I early retire in a few years – since we’ll be converting IRA to RothIRA up to the top of our marginal tax rate (Hopefully this will be in the 15% marginal rate bucket).
I fully acknowledge my overall tax rate is quite a bit higher – sales tax, property tax, state tax, gas tax, SS tax, medicare tax, etc.
