Thursday, December 02, 2010

Proposed Taxes Rates

There is often confusion about marginal tax rates. When people talk about being in one tax bracket or another they often think they are paying a flat tax rate on all their income. This just isn't true. Everyone pays the same rate on the first taxable dollar they make. Everyone pays the same rate on the 35,000th taxable dollar they make. Those rates are 10% and 15% respectively.

And I say "taxable dollar made" because everyone gets some form of deduction. It could simply be a personal deduction or it could be deductions for dependents or mortgage interest or charitable donations.

So I looked up the tax brackets for 2000 and 2010 for a person filing singly.  Those are the last year of the pre-Bush tax rates and the last year of the Bush tax rates respectively. I applied those marginal rates to incomes in increments of $20,000 dollars less the standard deduction only ($5350).

I then applied the proposed Obama option of restoring the pre-Bush tax rates to those making over $200,000 a year, again less the standard deduction. For this rate I assumed there would be no adjustments to the bracket amounts other than inserting the cutoff at $200,000.  Above $200,000 I assumed the highest tax rate from 2000, 39.6%.  Those details could vary if actually enacted.

This is what you get.

click to embiggen

As you can see, everyone will be paying less in taxes than they did in 2000. People who make more than 200,000 (250,000 if you are married filing jointly) will pay more in 2011 than they do in 2010 but still less than they did in 2000. And that assumes that all the income is salary and not capital gains which are taxed at 15%.

It also important to note that a salary above 200,000 puts you in the top 3.5% of the population.  These people "suffering a tax increase" - and I don't readily accept that description - will still be keeping $0.60 of every $1.00 they make over $200,000.  The idea that this tax rate will de-incentivize people from working is ludicrous.

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