By Alexandra F. Sirota
A great deal of confusion abounds in discussions about state personal income tax rates and how they apply to income. This policy basic clarifies th e difference between marginal and effective tax rates, and gives a North Carolina-specific example of how these rates work in action.
A taxpayer's marginal tax rate is the tax rate imposed on his or her last dollar of income. In a progressive personal income tax system, the tax rate applied to higher levels of income is higher than the rate applied to lower levels of income. Such a graduated rate structure is better able to keep up with a growing economy and ensure that those at the bottom of the income distribution don’t have to carry a heavier tax load than the wealthy.
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