A lot of misinformation has been floated since self-described radical Alexandria Ocasio-Cortez (AOC) suggested a 70% tax rate for the highest income taxpayers. I’m not going to argue for or against the tax bracket increase. It’s up to you to decide whether you think it would help or hurt the country (or yourself). But so you can make an informed decision, I want to look at how marginal tax rates actually work.
The immediate buzz against the idea was that AOC wants seventy cents of every dollar you make. That isn’t how tax brackets work. Instead, you pay a higher rate for every dollar you make above a certain threshold. The graphic at the right shows the 2018 brackets as described by the IRS.
Here’s how it works:
For simplicity’s sake, I’m not going to go through every possible scenario. That isn’t necessary. Instead, I’m going to use the example of a single person making a taxable income of $600-thousand in 2018.
|Top of Bracket||Marginal Tax||Tax|
|$9,525||On the first $9,525, you’d pay 10%||$953|
|$38,700||On the next $29,175, you’d pay 12%||$3,501|
|$82,500||On the next $43,800, you’d pay 22%||$9,636|
|$157,500||On the next $75,000, you’d pay 24%||$18,000|
|$200,000||On the next $42,500, you’d pay 32%||$13,600|
|$500,000||On the next $300,000, you’d pay 35%||$105,000|
|$600,000||On the next $100,000, you’d pay 37%||$37,000|
Even in this example, the Effective Tax Rate on a $600,000 income is 31%, not the maximum rate of 37%. And the $600,000 is taxable income, not gross income. If you used gross income, the Effective Tax Rate would be even lower.
When you are thinking about how much you pay in taxes (and how any change in the tax laws would affect you), please don’t just take the word of some talking head. Take a moment to do the math before you decide whether or not to support a new policy.
Now when I’m establishing my reserves, do I calculate my tax liability as a flat tax of the tax bracket into which I expect to fall? Yes. I always plan for the worst-case scenario. But that isn’t what I actually pay. Instead, when I get my final tax bill from my CPA, I have a little buffer to either roll forward in my tax reserve savings account or invest.
Again, this example isn’t meant to be tax planning advice. I’m not a tax professional. It’s just meant to cut through some of the BS that always flies around tax rate discussions. When you are figuring out your tax strategy, you should always talk to a real CPA.
Okay. Since you made it to the end I’ll tell you what I think: The government is underfunded for the level of services most Americans expect it to provide. That is why, when it has been in power, neither party has actually cut spending in decades. We have only three options:
- Lower expectations
- Increase funding
- Go broke
I personally think we can afford to pay a little more to get the level of service we demand. The real problem is that we don’t agree on what those services should be. And that’s a conversation we’re not even having.Hermann says please like and share!