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Using income tax as an example --
In 2008 s single tax payer will pay an income tax of 10% on taxable income up to $8,025. Taxable income over $8,025 up to $32,550 is taxed at a rate of 15%. Suppose the tax payer has taxable income of $10,000. This means they would pay 10% of $8,025 or $802.50 plus 15% of the amount over $8,025 which would be $296.25 ((10,000 - 8025) * .15) = 296.25 for a total tax of $1,098.75 (802.50 + 296.25 = 1098.75)
In this case the taxpayers marginal tax rate is 15% which is the rate on the last dollar of income.
The taxpayers effective rate is about 11% which is the total tax payed divided by the total income. (1098.75 / 10000 = .109875)
Marginal tax rate is the tax rate on the last dollar made. In other words if you make an additional dollar how much tax is paid. Conversly, if income is reduced what is the tax savings.

Bob
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