The math
What is an effective marginal tax rate?
The real rate on your next dollar, once lost benefits are counted.
The short answer
Your effective marginal tax rate is how much of each extra dollar you actually keep, after tax and after any benefits you lose. On a benefits cliff it can pass 100 percent, which means a raise leaves you with less. In Ohio, a $1,000 raise costs a family $19,076 a year, an effective rate far above 100 percent.
The rate on your payslip is not the real rate on a raise. Your payslip rate counts income tax and payroll tax. But benefits like food help, health coverage and childcare help are tied to your income, so as your pay rises they shrink. That lost help is a real cost of earning more, even though it never shows up as tax.
The effective marginal tax rate counts both: the tax you pay and the benefits you lose, for each extra dollar you earn. Most of the time it is a bit higher than your payslip rate. On a benefits cliff it can pass 100 percent, and when it does, earning more leaves you with less. That is the same thing as a cliff, described in the language economists use.
A worked example
Over 100 percent, in real dollars, for a family of 4 in Ohio:
Calculated live from published government rules for a family of 4 in Ohio, the same engine behind the calculator.
A rate over 100 percent sounds impossible, but it is just arithmetic: if a raise gains you a few thousand dollars in pay but costs you more than that in lost benefits, the rate on that raise is above 100 percent. Research from the Atlanta Federal Reserve and the Urban Institute finds the highest effective rates in the country fall not on top earners but on working families moving up.
The point of measuring it is not despair, it is direction. Once you can see where the rate spikes, you can see the income just past it where the rate falls back to normal and a raise pays off again. The free tool finds that point for your own household.
See the cliff where you live
The band where benefits fall away is different in every state. Pick yours to see the real number for a family like yours.
Questions people ask
- How can a tax rate be over 100 percent?
- It is over 100 percent when a raise costs you more than it pays. For a family of 4 in Ohio, a $1,000 raise can trigger about $19,076 in lost benefits and higher costs. Losing more than you gain is an effective rate above 100 percent.
- Is the effective marginal rate the same as my tax bracket?
- No. Your tax bracket only counts tax. The effective marginal rate also counts the benefits you lose as your pay rises, which for lower and moderate income families is often the larger cost. That is why the real rate on a raise can be far higher than any tax bracket.
- Where does my effective rate stop being over 100 percent?
- Past the income where your benefits have finished falling away. That is your safe exit: earn beyond it and each extra dollar keeps most of its value again. The free CliffCheck tool shows exactly where that point is for your household.