Is the average or the marginal tax rate more relevant to a new business startup?
On One Hand: The Marginal Tax Rate Is More RelevantThe marginal tax rate provides the rate at which each additional dollar is taxed until the next margin is reached. If you can lower the income of the business by finding additional write-offs, the taxes you save depend on the marginal tax rate. The average tax has nothing to do with determining the tax benefit of an additional write-off or the tax on additional incomeOn the Other: Average Tax Rate is Total Percent Paid End of YearThe average tax rate is the total percent of income paid in taxes at the end of the year. If the business has an income of $150,000 and pays a total of $30,000 the average tax rate is 20 percent. The highest marginal rate may be 35 percent. The average rate is only relevant for figuring the percent of total income paid in taxes.Bottom LineThe marginal tax rate is more relevant to a new start-up business than the average tax rate.
