Glossary

Tax bracket

A tax bracket is a range of income taxed at a specific rate under a progressive tax system. As taxable income rises, it crosses thresholds into higher brackets, but only the portion of income inside each band is taxed at that band's rate. This is why the rate on your top slice of income, the marginal rate, is usually higher than the effective rate you actually pay across all your income.

Consider a simplified example with three bands: 0% up to 12,000, 20% from 12,001 to 50,000, and 40% above 50,000. Someone earning 60,000 pays nothing on the first 12,000, 20% on the next 38,000 (7,600), and 40% on the final 10,000 (4,000), for a total of 11,600. That is an effective rate of about 19.3%, not 40%.

Bracket structures vary widely by country. The US federal system uses seven brackets, the UK applies basic, higher, and additional rates, and Italy, Germany, France, and Spain each set their own bands, with Germany using a continuously rising formula rather than fixed steps. You can see how these differ using our compare taxes by country tool.

Source: www.irs.gov