Thursday, April 08, 2010

Tax Bracket Stupidity

Marginal Tax Rate[3] Single Married Filing Jointly or Qualified Widow(er) Married Filing Separately Head of Household
10% $0 – $8,350 $0 – $16,700 $0 – $8,350 $0 – $11,950
15% $8,351– $33,950 $16,701 – $67,900 $8,351 – $33,950 $11,951 – $45,500
25% $33,951 – $82,250 $67,901 – $137,050 $33,951 – $68,525 $45,501 – $117,450
28% $82,251 – $171,550 $137,051 – $208,850 $68,525 – $104,425 $117,451 – $190,200
33% $171,551 – $372,950 $208,851 – $372,950 $104,426 – $186,475 $190,201 - $372,950
35% $372,951+ $372,951+ $186,476+ $372,951+

If you look at this table of Federal Tax Brackets you begin to understand how the government looks at wealth. Keep in mind that "marginal tax rates" apply only to the portion of income that exceeds the ceiling of the previous bracket. The gazillionaire pays 10% on his Adjusted Gross up to $8,350 and then he pays 15% on the amount from 8,351 on to ... etc. Once you make $372,951 you pay 35%, after all your deductions and excluding capital gains (on which you pay 15%) right up to ... well, gazillions.

Now somehow there is sufficient difference, $25,600, in incomes between 10% and 15% to justify a 5% increase in tax liability. There is no difference in income once you make $372,951, the government can't see it. As an individual you'll sure the hell see a difference in how you're treated and frankly the budget deficit sees it. If you toss the Alternative Minimum Tax into the picture you'll pretty quickly start to get some negative ideas.

Don't get me started on the idea that the SS/FICA tax with employer "contributions" at nearly 16% applied to all income up to $106,000 and nothing beyond doesn't have implications.

Which part of the fact that tax policy is not just about a budget, but also about behavior is it that misses most people? You do understand that in a given year there is a finite amount of income to be made in this year and that when some one person takes out huge amounts there is less left to go around. The fact that things like AMT and tax brackets aren't tied to median income amounts each year but rather to fixed dollar amount further states the problem.

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