Tax rate facts for kids

A tax system is how governments collect money to pay for things like schools, roads, and hospitals. The tax rate is like a price tag for taxes. It's a ratio, usually shown as a percentage, that tells you how much a business or person needs to pay in taxes. There are different ways to look at tax rates, like the official rate, the average rate you pay, or the rate on your last bit of income.

What Are the Different Kinds of Tax Rates?

There are a few main ways to talk about tax rates. Each one helps us understand taxes from a different angle.

Statutory Tax Rate: The Official Rule

• A statutory tax rate is the official rate written in the law. For example, a country might have different income tax rates for different levels of income. This means if you earn more, a higher percentage of that extra money might go to taxes. A sales tax, which you pay when you buy things, usually has one flat rate for everyone.

Average Tax Rate: What You Pay on Everything

• An average tax rate looks at the total amount of taxes you paid and compares it to your total income or the total value of what's being taxed (this is called the tax base). It's shown as a percentage. So, if you paid $100 in taxes on an income of $1,000, your average tax rate would be 10%.

Marginal Tax Rate: The Rate on Your Next Dollar

• A marginal tax rate is the tax rate applied to the very last bit of income you earn. Many income tax systems have different "brackets." If your income goes above a certain amount, any money you earn after that point might be taxed at a higher marginal rate. This doesn't mean all your money is taxed at that higher rate, just the part that falls into the higher bracket.