Effective tax rate

The ratio of the actual tax paid to your taxable income. When taxable brackets are progressive, the effective tax rate ends up being lower than the marginal tax rate.

For example, assume a taxable income of $100 under a tax regime with two tax brackets. The first bracket taxes income from $1 to $40 at a rate of 10%, the second bracket taxes income from $41 to $1000 at 15%.

Tax due on $100 = $40 * 10% + $60 * 15% = $13. This gives us an effective tax rate of 13%. The marginal tax rate for a taxable income of $100 is 15%, but the effective tax rate is lower, at 13%.

Marginal tax rate

In a system of progressive taxation the marginal tax rate is the tax rate of the highest tax bracket.
The marginal tax rate will always be higher than the effective tax rate.

Consider the following tax brackets.

Income: $0 to $20,000 Tax rate: 10%
Income: $20,001 to $100,000 Tax rate: 15%
For an income of $50,000, the marginal tax rate is 15%. On an income of $50,000 the actual tax paid would be $6500. So the effective tax rate is 13% which is less than 15%.

Progressive taxation

Progressive taxation implies more taxes for higher incomes/more wealth.

An example of flat taxation is a tax rate of 5%. Whether you make $5000 or $5,000,000, you pay 5% of your income in taxes.

An example of progressive taxation is a system of tax brackets.

Income: $0 to $20,000 Tax rate: 10%
Income: $20,001 to $100,000 Tax rate: 15%

Tikkie

Tikkie is an app by ABN AMRO that is used to request a payment from a person or a group. It is super popular in the Netherlands (7 million users!) and if you go out with a group to eat/drink chances are high that you will hear someone say, "I'll tikkie you" when it comes time to split the bill. You need to have the app to request payments. You do not need the app to make a payment - just a Dutch phone number and Dutch bank account. You can send a Tikkie via Whatsapp, SMS or email.