Years ago, I somehow ended up at a dinner party with a brain surgeon. He’d been having some trouble at work and was looking for a new job. He mentioned that there was a job in another state that paid $50k/yr more, but it wasn’t worth it, he said, because it would put him in a higher tax bracket. There’s a good chance that he didn’t understand marginal tax rates, and he’s not alone — there seem to be very few people who do. Marginal tax rates are perhaps the most important tool toward peacefully resolving the many practical issues Americans face today.
Let’s consider a pretend country called “Smurfia”. Smurfia only has two tax rates: 1% for $99,999 and below, and 37% for $100,000 and above. I’ve used 37% because that is the top US marginal tax rate. There are no deductions or credits available. Bob is paid $20,000 per year, so he is going to pay $200 per year in income tax; 1% of $20,000 is $200. Stephanie is paid $99,999, so she is going to pay $999 per year. Ernie is paid $100,000 per year. This does NOT mean that Ernie pays $37,000 in taxes. Ernie pays 1% on the first portion of his income ($99,999, so $999 in tax) and 37% on the second portion ($1, so 37 cents in tax). Ernie pays $999.37.
With a marginal tax rate, you never bring home less money because you were paid more money. That can’t happen. (There are snafus like this for other aspects of taxation, but not for marginal tax rates.)
So what are the US marginal tax rates? What are the margins and what are the rates?
| Single | Married Filing Jointly | Married Filing Separately | Head of Household | |
| 10% | $0-$9,875 | $0-$19,750 | $0-$9,875 | $0-$14,100 |
| 12% | $9,876-$40,125 | $19,751-$80,250 | $9.876-$40,125 | $14,101-$53,700 |
| 22% | $40,126-$85,525 | $80,251-$171,050 | $40,126-$85,525 | $53,701-$85,500 |
| 24% | $85,536-$163,300 | $171,051-$326,600 | $85,526-$163,300 | $85,501-$163,300 |
| 32% | $163,301-$207,350 | $326,601-$414,700 | $163,301-$207,350 | $163,301-$207,350 |
| 35% | $207,351-$518,400 | $414,701-$622,050 | $207,351-$518,400 | $207,351-$518,400 |
| 37% | $518,401+ | $622,051+ | $518,401+ | $518,401+ |
In the US, things are a lot more complicated than Smurfia because we have tax deductions and tax credits, but we can apply the same example to these real marginal tax rates. Below are Bob, Stephanie, and Ernie’s income, marginal tax, rate, and the amount they pay in taxes. They are all filing as “single”.
| Income | Marginal Rate | Tax | |
| Bob: | $20,000 | 12% | $2400 |
| Stephanie: | $40,125 | 22% | $4815 |
| Ernie: | $40,128 | 24% | $4816 |
Ernie makes $3/yr more than Stephanie, and ends up paying $1/yr more in income tax.
Thanks to deductions, none of the people in my example will end up paying very much tax. Bob won’t pay anything. You may have heard that roughly half of tax filers don’t pay any tax. Most of that is because of people like Bob who don’t get paid very much money (he’s paid about $10/hr, so still better than minimum wage), but a significant chunk of that is due to very wealthy people who are able to use tax deductions and credits to their advantage.
There are two interesting things about our current marginal tax rates, though. First off, we are in an age when we have people making millions of dollars per year — and even millions of dollars per hour — and yet the margins stop at $518,401 (for people filing as single). In addition, the top rate was much, much higher during the time period when the US economy had massive growth (92% in 1952, 91% from 1952 to 1961), and that growth benefited both wealthy and working class people. That’s not a coincidence, but rather a direct causal relationship. More reasonable marginal tax rates benefit our whole society, making it more healthy and stable.
Given these two issues, how could our marginal tax rates be better? In the context of the severity of the issues we’re facing, an extremely high top rate would be appropriate — perhaps the 95% that the US had as the top rate from 1944-45. We also need those margin points to be spread out a bit since we have people who are being paid so much more than they were in the 1960’s. That 95% tax rate might work well at $5,000,000/yr and above rather than trying to apply it to the $518,401+ income level where the top marginal rate currently falls. In fact, by repositioning the margins, you could effectively lower the tax rate for most taxpayers, have more revenue for government services, and start correcting the ludicrous inequality that we see today.
Here’s what that might look like:
| Single | |
| 10% | $0-$12,000 |
| 12% | $12,001-$60,000 |
| 22% | $60,001-$100,000 |
| 24% | $100,001-$200,000 |
| 32% | $200,001-$350,000 |
| 35% | $350,001-$700,000 |
| 37% | $700,001-$1,000,000 |
| 45% | $1,000,001-$2,000,000 |
| 75% | $2,000,001-$5,000,000 |
| 95% | $5,000,001-$15,000,000 |
| 99% | $15,000,001+ |
I only included the “single” filing category since I’m just spitballing here, and you get the idea. An expert with access to detailed taxpayer data would be required to really figure out where these margins should lie.
Are these marginal tax rates politically possible? Probably not right now, but we need to have idealized goals so we know what we’re working toward. If I were an aspiring weightlifter, for example, I can’t expect to walk into the gym and lift my goal weight today. I have to work toward a big goal while also setting up smaller goals along the way. I wouldn’t want to just give up on the big goal before I even started putting in the work.
There are also a lot of taxes out there that are regressive. Take, for example, taxes on food purchases. Since everyone eats about the same amount of food, taxes on food end up placing a very heavy burden on people who have a lower income, but effectively no burden on the rich. The more general sales tax isn’t quite as regressive, but it’s still regressive. Property tax is quite regressive, having no regard for the income of the person paying. The anti-tax propaganda we see in the media is focused on the income tax because it is a progressive tax — it places a bigger tax burden on the rich than on working class people — and because wealthy people own the media.