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LadyGeek wrote:Let's get the definitions right. Be sure that the concept of marginal tax rate is understood: Marginal Tax Rate (also explained - progressive tax)
Effective and marginal rates are used for different purposes. Read the referenced forum thread: Important to know Marginal Tax Rate? Effective Tax Rate?
Epsilon Delta wrote:I read the wiki and notice the following idea is missing. It could be under "using marginal rate for investment decisions"
The marginal tax rate can be different for different types of income. Clearly it is different for capital gains than for ordinary income, but in many case it is different for SS income, earned income (e.g. EITC), municipal bond income etc. When making a decision you need to use the marginal rate for the type of income you are thinking of changing. When making a decision involving many different types of income sometimes "marginal tax rate" is not helpful and it is better to just calculate the taxes for the two situations and pick the lower.
Epsilon Delta wrote:It probably would not be helpful to point out the "marginal tax rate" is really a partial derivative.
LadyGeek wrote:I updated the wiki to show how the percentages were calculated. See: Marginal Tax Rate. For the last example, I got 23% instead of 21%. Can you please double-check?
LadyGeek wrote:Epsilon Delta wrote:It probably would not be helpful to point out the "marginal tax rate" is really a partial derivative.
I'm also partial to derivatives, care to expand?
Code: Select all
Increase your income from say $20,000 to $20,100 you have $100 in extra income and pay $15 in extra tax the marginal rate is $15/$100 or 15%. So your marginal tax rate at an income of $20,000 is 15%.
tax(20,000 + 100) - tax(20,000)
marginal tax rate at income of $20,000 = -------------------------------
(20,000 + 100) - (20,000)
tax( I + Δ ) - tax( I )
marginal tax rate(I) = -----------------------
Δ
df(x) f(x+δ) - f(x)
----- = lim -------------
dx δ→∞ δ
grabiner wrote:
Thanks for this suggestion; I updated it on the wiki.
Epsilon Delta wrote:[...]I will now wish a good day to my one remaining reader.
porcupine wrote:Let me see if I understand it right. The basic interpretation is that the effective tax rate is the extra tax that one would pay if one made a buck more (in the income bucket).
What you are adding to that interpretation is that that extra tax rate would vary depending on what it is that resulted in the extra buck being added to income, right? In other words, from a basic rise (in taxes, on the y-axis) over run (in income, on the x-axis) in a two-dimensional plot, you are wanting to introduce, x1 .. xn where all these different "x"s impact y, thereby converting our nice 2D figure into a multidimensional jigsaw.
- Porcupine
Epsilon Delta wrote:porcupine wrote:Let me see if I understand it right. The basic interpretation is that the effective tax rate is the extra tax that one would pay if one made a buck more (in the income bucket).
That's all true....
Epsilon Delta wrote:LadyGeek wrote:Epsilon Delta wrote:It probably would not be helpful to point out the "marginal tax rate" is really a partial derivative.
I'm also partial to derivatives, care to expand?
I'll try to explain, but it can be tricky because I'm not sure what you already understand. I'm going to assume you already know some calculus and have read some economics but never put them together.
...
I will now wish a good day to my one remaining reader.
retiredjg wrote:Epsilon Delta wrote:porcupine wrote:Let me see if I understand it right. The basic interpretation is that the effective tax rate is the extra tax that one would pay if one made a buck more (in the income bucket).
That's all true....
Well, then maybe I'm very confused. I believe that would be the marginal rate, not the effective rate.
LadyGeek wrote:Exactly. I have seen the equations before, but the point was never brought home. Your post was clear and insightful.
Comments / questions / concerns are welcome.
consider how much additional tax you would owe if you added $1 to your income.
Epsilon Delta wrote:...I have read the wiki and have no objection to you using my text. To me it does not seem as coherent as the rest of the article, I'm not sure if could be tweaked or if it belongs elsewhere. If anything else comes to me I'll post again.
I do have two specific suggestions....
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