marginal tax rate

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The amount by which tax liability increases per unit increase in value of a taxed activity. The statutory marginal tax rate can be obtained from published tax rules. The effect of deductions and exclusions can result in the effective marginal tax rate being different from the statutory marginal tax rate. For example, the phasing-out of tax credits raises the effective marginal rate of tax above the statutory rate of tax. The marginal tax rate is important through the effect that it has upon incentives. For example, a consumer determines labour supply by equating the marginal benefit of additional labour to the marginal cost. The marginal benefit is w(1 − t), where t is the marginal rate of tax.

Subjects: Economics.

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