The United States employs a progressive tax system, where the tax rate increases as an individual’s income rises. This structure aims to distribute the tax burden more equitably, with higher earners paying a larger share of their income. The system uses marginal tax rates, which apply to specific income brackets, but the effective tax rate reflects the actual percentage of income paid in taxes. Understanding these concepts is key to grasping how taxes work.
In a progressive tax system, income is taxed in tiers. For 2025, the federal income tax brackets for a single filer are (simplified for clarity):
- 10% on income up to $11,600
- 12% on income from $11,601 to $47,150,
- 22% from $47,151 to $100,525
- 24% from $100,526 to $191,950
Higher rates apply for income above that. Each bracket taxes only the income within its range, not the entire income. This is where the marginal tax rate comes in—it’s the rate applied to the next dollar earned in a given bracket.
Consider a single individual earning $115,000 in 2025. Their income is taxed as follows:
- $11,600 at 10% = $1,160
- $35,550 ($47,150 – $11,601) at 12% = $4,266
- $53,375 ($100,525 – $47,151) at 22% = $11,742.50
- $14,475 ($115,000 – $100,526) at 24% = $3,474
The total tax before deductions is $20,642.50. However, this doesn’t mean they pay 24% on all their income—the 24% rate only applies to income above $100,525.
The effective tax rate, by contrast, is the total tax paid divided by total income. For this individual, $20,642.50 divided by $115,000 yields an effective tax rate of about 17.95%. This is lower than the marginal rate of 24% because earlier income was taxed at lower rates. Deductions and credits, like the standard deduction ($14,600 for singles in 2025), further reduce taxable income. With the standard deduction, their taxable income drops to $100,400, lowering their tax liability to approximately $15,928, and their effective tax rate to about 13.85%.
The progressive tax system ensures that higher earners contribute more, but the distinction between marginal and effective rates clarifies that no one pays their top marginal rate on their entire income. For our $115,000 earner, the marginal rate signals the tax on additional income, while the effective rate shows their overall tax burden. This structure balances fairness with incentives for earning, though debates persist about its complexity and fairness across income levels.
