tiered rate
Also called: tiered rates, tiered commission, slab rate
A rate that changes by slices of the base, each rate applying only to its own slice, as in a commission of 10% up to 100,000 and 15% above. It has an effective rate (total ÷ base) and a marginal rate (on the next unit).
Under a tiered rate the base is cut into slices, and each slice has its own rate. Only the part of the base inside a slice is charged at that slice’s rate. Progressive taxes, volume discounts and sales commissions often work this way.
Two numbers describe the result. The effective rate is the total divided by the whole base: what you pay or earn on average. The marginal rate is the rate on the next unit, the rate of the slice you are in. When rates rise from slice to slice, the effective rate is always below the marginal one.
The classic mistake is to apply the top rate to everything: "you’re in the 20% bracket" does not mean 20% of the whole amount.
Example
Commission: 10% on the first 100,000 UAH of sales, 15% from 100,000 to 300,000, 20% above. For 380,000:
- 10% × 100,000 = 10,000
- 15% × 200,000 = 30,000
- 20% × 80,000 = 16,000
Total 56,000 UAH. Effective rate 56,000 ÷ 380,000 = 14.74%; marginal rate 20%. Applying 20% to everything would give 76,000.
Common mistakes
- Top rate on everything. Each rate touches only its slice.
- Wrong slice widths. 100,000 to 300,000 is a slice of 200,000, not 300,000.
- Confusing effective and marginal. Use the marginal rate to judge the next deal, the effective rate to budget the total.
Learn it in the course
- Inequalities, intervals and formulas with cases · <, ≤, ± and intervals, "if and only if", min and max, formulas with cases, fences, payback as the first month that clears a bar, and tiered rates with effective vs marginal.