The phrases “marginal income” and “marginal income tax” are very similar, but they refer to vastly different concepts. If you run a business, you should understand the basic differences between these two concepts. Marginal income, in particular, is critical for manufacturing and production businesses to understand.
Marginal income refers to the difference between sales revenue and variable costs. For example, if a company sells $100,000 worth of products and has $40,000 in variable costs, it has $60,000 in marginal income. Variable costs are production costs that change. For instance, this can include manufacturing supplies and energy costs. It does not include fixed costs such as rent, business insurance, and payroll.
Businesses may track their total marginal income, or they may break down these amounts to focus on the marginal income associated with specific products. That can be a useful way to track and compare the profitability of different products
In contrast, marginal income tax basically refers to tax brackets. To explain, the Canada Revenue Agency applies income tax at different rates depending on the amount of income involved. For example, as of 2018, individual taxpayers pay 15 percent of taxable income up to $46,605, but they pay 20.5 percent income tax on taxable income between $46,605 and $93,208. The rate continues to increase with higher amounts of income. Marginal income tax does not refer to an individual or business’s final or effective tax rate. It only refers to the rate assessed on income in each bracket.
Running a business requires you to be conversant in all kinds of financial concepts. When you understand the differences between marginal income and marginal income tax rates, you are better armed to communicate with accountants, lenders, and other finance professionals about your business.