Thursday, November 10, 2011

Average rates and Marginal Rates

What is the different between Average Rates and Marginal Rates?

The tax rates of §1 apply only to the income that is left after subtraction of the standard deduction and personal exemptions. Chill effects, which prevent people from earning more income, are bad policy and the IRS tries to avoid them whenever possible. Some chill effects do exist. For example,  ff Congress is trying to adjust the distribution of tax burdens among taxpayers of differing incomes, its focus should be on average rates. But for tax planning purposes, the marginal rate is the crucial factor.

The tax savings from a deduction is the amount of the deduction multiplied by the taxpayer’s marginal rate.

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