In progressive taxation, the term tax bracket refers to one of multiple tiers into which the income or wealth of a taxable entity are divided in order to calculate their tax burden. The tax rate at which income or wealth which falls into a specific bracket is taxed is known as the marginal tax rate. Marginal tax rates can vary between tax brackets.
Simple example of tax brackets:
A taxpayer earns a taxable annual income equivalent to 50,000 Swiss francs per year. For the sake of simplicity, let’s say the tax office uses 10,000-Swiss-franc income tax brackets with a 2% income tax rate applied to the lowest bracket and the tax rate increasing by 2% for each additional bracket:
1. CHF 0 – 10,000 = 2% income tax
2. CHF 10,000.01 – 20,000 = 4% income tax
3. CHF 20,000.01 – 30,000 = 6% income tax
4. CHF 30,000.01 – 40,000 = 8% income tax
5. CHF 40,000.01 – 50,000 = 10% income tax
In this example, the taxpayer’s annual income would pay: 2% income tax (200 francs) on their first 10,000 francs of income; 4% tax (400 francs) on the second 10,000 francs of income; 6% tax (600 francs) on the third 10,000 francs of income; 8% tax (800 francs) on the fourth 10,000 francs of income; 10% tax (1000 francs) on the fifth 10,000 francs of income. Their total income tax burden would come to 3000 francs or a mean average of 6% of their income.
If the same taxpayer earned 41,000 francs per year, only the 1000 francs which fall under the fifth tax bracket would be taxed at the marginal tax rate of 10%.