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Related: Editorials & Other Articles, Issue Forums, Alliance Forums, Region ForumsA friend who teaches federal tax law explained to me how marginal tax rates work
"Agree or disagree with AOC about preferred tax rates on millions a year of income, understanding marginal tax rates is critical. And what I've found from teaching federal income tax to law students is that many many many smart people don't understand the concept.
What people think: if the marginal tax rate on income of, say, $1m/year of income is 50%, a single taxpayer making $2,000,000 of income (after retirement savings and other personalized deductions) has a tax bill $1,000,000.
This isn't right. Instead, the first $12,200 is tax-free as the "standard deduction". The next $9,700--so up to $21,900 in income--is taxed at 0%. So the tax bill on up to $21,900 *for everyone* is $0.
From $21,901-$51,675, the marginal tax rate *for everyone* is 12%. So someone making $51,675 owes $3,573 total in federal income tax (again: 0% ($0) on the first $21,900 + 12% on the next $29,775 ($3,573) = $3,573).
From $51,676-$96,400, the marginal tax rate is 22%. So the total tax bill for someone making $96,400 is $13,412.50 ($0+$3,573+$9,839.50).
From $96,401-$172,925, the marginal tax rate is 24%. The total tax bill for someone making $172,925 is $31,778.26 ($0+$3,573+$9,839.50+$18,365.76).
For income between $172,926-$216,300, the marginal tax rate is 32% so the total tax bill for someone making $216,300 is $45,657.94 ($0+ $3,573+ $9,839.50+ $18,365.76+ $13,879.68).
For $216,301-$522,500, the marginal tax rate is 35%. The total tax bill for someone making $522,500 in a year? $152,827.59 ($0+ $3,573+ $9,839.50+ $18,365.76+ $13,879.68 + $107,169.65).
For amounts above $522,500, the marginal tax rate is 37%. So our hypothetical taxpayer with $2,000,000 in taxable income pays $699,502.59 ($0+ $3,573+ $9,839.50+ $18,365.76+ $13,879.68 + $107,169.65 + $546,675) in federal income tax currently.
Under the hypothesized new highest marginal rate of 50%, this taxpayer would pay $829,502.59 in tax ($0+ $3,573+ $9,839.50+ $18,365.76+ $13,879.68 + $107,169.65 + $176,675 + $500,000) in federal income tax. No, it's not a small bill. But it is $170,000 LESS THAN if the effect of a 50% marginal rate at $1m was in fact a 50% tax on income.
Why have a progressive tax structure like this instead of a flat tax? Because minimum costs for food, housing, and clothes--the bare necessities--are the same whether you earn $21,900 or $2,000,000 per year and we (as a society) believe people should be able to earn the funds to pay for these things without contributing to the general federal coffers. (Keep in mind these people still pay social security tax, sales tax, property tax, and often state income tax.) Above that, the importance of each dollar of income to sustaining life goes down: for the person making $21,900 a year, an extra $1000 is A LOT of money in terms of the lifestyle difference it makes. For the person earning $1,000,000, it is almost literally nothing.
You can disagree with the concepts or with the appropriate numbers, or with the idea that people who have more (and get more from the government, in terms of protection for private property and access to interstate travel, for example--since it's hard to do a vacation on $21,900/year) should pay in at a higher rate, but understanding the effect of marginal tax rates is the basis for having an educated opinion on it all."
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The practical upshot is to understand that a 50% marginal federal income tax rate on the very wealthy will not require that they write a check to the IRS for half their income, whether one is in favor of a 50% marginal tax or against.
Beakybird
(3,332 posts)The best way to explain it is if someone makes $1,000,010, they only get taxed 70% on ten dollars.
TheBlackAdder
(28,179 posts).
It's funny how they always seem to forget that part of what Adam Smith wrote.
.
ewagner
(18,964 posts)I'm shocked that most of my conservative friends either don't know this or choose to ignore it.
Farmer-Rick
(10,150 posts)I've always wondered exactly why the qualifier "marginal" on the tax rate.
On top of this, we should remember that the uber rich don't pay Social Security on anything more than the first $132,900.
Roy Rolling
(6,911 posts)One, a very thorough and accurate analysis of the income tax
Second, for reminding me that some are not acquainted with this as I am. Truly, it's something that must be addressed when debating issues such as this. Slip in the word "marginal" and a good many people are confused.
When "motivating the masses" we must use language and words understood by all. And the burden is on the SPEAKER to use understandable words and terms, not the LISTENER.
watoos
(7,142 posts)I doubt that Trump pays taxes.
cbdo2007
(9,213 posts)Most people making the $2,000,000 in your example are still actually paying less in taxes due to various deductions and credits available to them, so even a 50% marginal tax rate isn't an actual percent of taxes paid. (there's a name for that put don't have it on the top of my head)
Dopers_Greed
(2,640 posts)And yet try to debate about taxes.
marybourg
(12,606 posts)either, but talk about it constantly, lately
Major Nikon
(36,827 posts)The real fuckery is the GOP's ability to convince the rubes that millions in income on equity should be taxed at an even lower rate than those making less than $96K.
PoindexterOglethorpe
(25,839 posts)Over the years I've periodically had someone complain hysterically that because of a recent wage increase, they are NOW PAYING MORE TAXES!!! And yeah, they are usually hyperventilating like that.
Even when I get them to look at the pay stub and see that they are still taking home more than they were before, they usually don't get it.
LittleGirl
(8,282 posts)I have bookmarked it for future reference.
Most heros don't wear capes, they post on DU!
ehrnst
(32,640 posts)LittleGirl
(8,282 posts)You are a hero too! Thanks so much!
Takket
(21,550 posts)I will graciously make them this offer: they can switch salaries with me. They will have a much smaller tax bill, but much smaller income as well.
So after all the outrage about unfairness, how many millionaires do you think would take my offer?
brooklynite
(94,461 posts)Tell people "Reagan supported a 50% top tax rate"
LiberalFighter
(50,825 posts)are those that have never done their own tax return.
marybourg
(12,606 posts)have more of than poor people, there is a separate 0% bracket, in addition.
progree
(10,901 posts)(NIIT = Net Investment Income Tax)
progree
(10,901 posts)The next $9,700 is taxed at 10%, not 0%. So the tax bill on the first $21,900 is $970.
From $21,901-$51,675, the marginal tax rate *for everyone* is 12%. So someone making $51,675 owes $4,543 total in federal income tax (again 0% on the first $12,200 ($0) and 10% on the next $9700 ($970) and 12% on the next $29,775 ($3,573) = $970 + $3,573 = $4,543).
I didn't check the next few brackets individually, except the last one -- the $2,000,000 income -- and the tax bill is $970 too low. So it seems that the initial error -- the first $9,700 in income above the standard deduction -- is taxed at 10%, not 0% -- is probably the only error.
I get a somewhat different number for when the hypothetical top marginal rate of 50%
Total tax bill = $970+ $3,573+ $9,839.50+ $18,365.76+ $13,879.68 + $107,169.65 + $738,750 = $892,547.59
Again, thanks for taking the time to thoroughly explain marginal tax rates.
harumph
(1,896 posts)is not taxed as "ordinary income."
forgotmylogin
(7,522 posts)...that this type of taxation, where accumulating *so* much money provides less incentive (diminishing returns as you make more money) actually is positive for society, since the "smart" people who seek the most lucrative money-making careers, which are about earning money from other people - often ruthlessly, might instead go into science or teaching or any more society-beneficial career because the reward is leveled out.
Dem_4_Life
(1,765 posts)I am bookmarking this for later.
Scruffy1
(3,254 posts)Hassin Bin Sober
(26,318 posts)... and conveniently earned exactly $200,000 dollars per year - which was the beginning of the bracket proposed by Obama.
Never mind they wouldnt have seen a dimes worth of increase IF they really earned that much. The media still gave them a voice.
With all the deductions available to people typically earning that income, one would have to earn over $300k to start paying anything equaling more than pocket change.
Locally here in Chicago we had some University of Chicago professor whining about his and his wifes high income woes. When you did the math with all his deductions, his troubles were minuscule. (That dude just reared his ugly head in some other nonsense right wing editorial that escapes my mind at the moment)
ooky
(8,920 posts)They want to buy politicians who will "de-regulate" and then set up their money making ventures ripping people off, live off the fruits of our land and then not contribute anything back into the system that's making them fat and happy.
Fuck them and their "flat tax", they are evil bastards.
LuckyCharms
(17,425 posts)is to explain this concept in terms of both the MARGINAL rate and the EFFECTIVE rate.
The effective rate would be the total bottom line tax (after going through all of the progressive rate levels) divided by taxable income. In your example, the effective rate for the person having 2,000,000 in taxable income is 41%, vs. the marginal rate of 50%. A person having "only" $1,100,000 in taxable income would have a marginal tax rate of 50%, but an effective tax rate of only about 40%. A person having $700,000 in taxable income has a marginal rate of 50%, but an effective rate of 34%.