Understanding Tax Brackets: How Progressive Taxation Works
Tax brackets are a fundamental part of income tax systems in most countries. This guide explains how they work.
What Are Tax Brackets?
Tax brackets are income ranges that are taxed at different rates. As your income increases, different portions are taxed at progressively higher rates.
How Progressive Taxation Works
In a progressive tax system:
- Lower income is taxed at lower rates
- Higher income is taxed at higher rates
- Only the income within each bracket is taxed at that bracket's rate
Example Calculation
If you earn $75,000 and the brackets are:
- 10% on income up to $10,000
- 20% on income from $10,001 to $40,000
- 30% on income above $40,000
Your tax would be:
- $10,000 × 10% = $1,000
- $30,000 × 20% = $6,000
- $35,000 × 30% = $10,500
- Total: $17,500
Marginal vs Effective Tax Rate
Marginal tax rate is the rate on your highest income bracket (30% in the example above).
Effective tax rate is your total tax divided by total income ($17,500 ÷ $75,000 = 23.3% in the example).
Country-Specific Information
Tax brackets vary by country:
- US: 7 federal brackets from 10% to 37%
- Germany: Progressive rates from 14% to 45%
- UK: Basic rate (20%), higher rate (40%), additional rate (45%)
Use our country-specific calculators to see how brackets apply to your income.