x
= B
The marginal rate
The problem
The economic literature shows a conceptual problem, or paradox, on marginal rates. Statutory marginal rates are important in popular understanding, but not in the empirical data. Research, as witnessed by the existing literature such as Gelauff (1992), deals better with the data, but doesn’t convince the popular view. The following analysis suggests a solution.
Partial versus total derivative
Conventional theory, public discussion and empirical research generally use statutory rates as the “marginals”. With T[y] the tax associated with income y, the marginal rate commonly is computed as
T[y]/