A close look at federal income tax rates.

While filling out some financial paperwork today, I was asked to state my federal tax bracket.  I found a handy dandy little tool from Bankrate.com (though there are many others available as well, so no specific endorsement here).

I did a little work with this calculator to find out how much, on average, people at different income levels are (in theory) paying in taxes.  I know that there are differences based on itemized deductions, dependents, etc.  For arguments sake and keeping it “apples to apples” we’ll ignore that for now.

If you are a single person with no dependents making $50,000 (a decent salary in many areas of our country), your tax rate  is 12.5%, and with the standard deduction you will pay $6,250 in federal taxes.
At this income level, if you are married and file jointly, your tax rate drops 4.9 points to 7.6%, making your taxes $3,800.  By the way, I think it’s inappropriate for the government to financially incentivize marriage and procreation, but that’s another topic.
To give more comparisons:

Annual Income

Tax Rate

Tax Rate

Income Taxes Paid

single

MFJ

single

MFJ

30,000

8.83%

3.67%

$2,650

$1,100

100,000

18.96

12.5%

$18,975

$12,500

500,000

29.8%

27.64%

$148,989

$138,222

1,000,000

32.4%

31.32%

$323,989

$313,222

10,000,000

34.74%

34.63%

$3,473,989

$3,463,222

If you’ll notice, the income tax rates begin rather high and ratchet up quickly until you get to the seven-figure mark where they level off.  Now, I know that for many Americans, $30,000 is not a particularly low or uncommon a salary, but it also is pretty hard to live on that amount of money in many of the most desirable cities.  I don’t live in a big city and I sure as shit couldn’t pay rent, utilities, and still afford to eat on that salary.  Where I am, $1,400 a month isn’t a crazy amount for rent.  Assuming I would pay $2,650 in income taxes, that would leave me with a little less than $900 a month for everything else (state income taxes, healthcare, bills, food, auto, savings, etc.).

Now, when you look at how much people making over a million pay in taxes, it’s not a small amount of money by any stretch.  I know that many wealthy Americans view a high income tax rate as incredibly unfair; as if they were being punished for being financially successful.

I would argue that while it may feel like an unfair burden to the top 5% earners of the nation to have to pay more in taxes, they are the only ones who can afford to keep this country running, and because of their abilities and good fortune,  it’s their civic duty to do so.  When America is operating with enough money to fund free, high-quality preK through college education, free or low-cost high-quality healthcare, and enough money to maintain, improve and build new infrastructure, they, their employees, their customers and ultimately their businesses will benefit as the entire nation is healthier, better educated, and has more disposable income to spend.  It will give America back its competitive edge in the world market, bring back jobs and manufacturing to American soil, and put our country back on top.

The fact is, even when someone making $10 million “loses” $3.5 million to federal taxes, they’re still taking home $6,536,778.  That’s more than enough to cover the bills and live like a king.  The sad truth is that when you make that much, you can afford to pay a team of lawyers and accountants to help find ways to create deductions and losses to lower your effective tax rate and pay less than your share.  Aside from that, most of the ultra-rich make a good portion of their income from capital gains which isn’t taxed the way that wages/salaries are (there are also online calculators to show tax rates for capital gains).  At that level, you also have the political power to change tax laws in your favor to keep more money in your pockets.

But the wealthy aren’t the only ones with political power.  When people get together in large numbers with a common goal, it becomes a movement that is very hard for government to ignore.  America needs to take a good mathematical look at our current tax rates and work to make them more equitable.  Check out Berkeley’s Robert Reich in his video about the topic of wealth inequality, made back in 2005:

How Unequal Can America Get?

http://www.senate.gov/reference/common/faq/How_to_contact_senators.htm

http://www.house.gov/representatives/find/

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