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Marginal Tax Rates: The Super Easy Explainer America Needs
Written by <a href="index.php?option=com_comprofiler&task=userProfile&user=48954"><span class="small">Jason Linkins, ThinkProgress</span></a>   
Thursday, 10 January 2019 13:31

Linkins writes: "Knowledge of marginal tax rates should be a part of everyone's basic civics education, but as it's not, there's no sense in shaming ordinary people for not knowing."

Representative Alexandria Ocasio-Cortez. (photo: Melina Mara/Getty)
Representative Alexandria Ocasio-Cortez. (photo: Melina Mara/Getty)

Marginal Tax Rates: The Super Easy Explainer America Needs

By Jason Linkins, ThinkProgress

10 January 19

A recent proposal from Rep. Alexandria Ocasio-Cortez brought out critics who either don't understand how our tax system works -- or who don't want you to understand it.

here are only three sure things in life. The first is death. The second is taxes. And the third is that in any discussion of the second, someone will inevitably be confused by the matter of marginal tax rates. While we will spend our entire lives railing against all three of life’s certainties, it is only this last one that we have any hope at ameliorating.

Marginal tax rates and how they function in our lives became a renewed topic of conversation in recent days thanks to a 60 Minutes segment from this past weekend featuring newly elected Rep. Alexandria Ocasio-Cortez (D-NY), whose star has shone brightly since her arrival in Washington thanks to the artful way she’s used her social media presence to make the practice of politics seem more accessible to ordinary people.

In that spirit, let’s undertake an explanation of how marginal tax rates work, because it’s long been an area where opportunistic deceivers have thrived at the expense of honest people.

During her 60 Minutes interview, attention turned to one of Ocasio-Cortez’s policy priorities: the passage of what’s become colloquially known as the “Green New Deal,” which proposes that the United States pursue a path away from fossil fuels and toward green energy, while making sure that workers currently in the industry are treated fairly during this transition. Due to the fact that Ocasio-Cortez supports an ambitious, progressive-minded economic policy and not a gargantuan build-up of the Pentagon budget for no discernible reason, her 60 Minutes interlocutor, Anderson Cooper, asked her how she would pay for it.

In a game attempt to provide an answer, Ocasio-Cortez essentially offered this plan: use our progressive system of taxation to soak the rich.

“Once you get to the tippy-tops, on your $10 millionth dollar, sometimes you see tax rates as high as 60 percent or 70 percent,” she explained. “That doesn’t mean all $10 million dollars are taxed at an extremely high rate. But it means that as you climb up this ladder, you should be contributing more.”

Of course, this is just one way that the Green New Deal could be funded. One could also pay for the program through a series of carbon taxes, or a financial transaction tax, or some combination platter of taxes and fees. Alternatively, Democrats could opt to go the route often taken by Republicans, and not address the pay-for matter at all.

Regardless, in the wake of Ocasio-Cortez proposing a 70 percent tax rate on top earners, her critics emerged from the woodwork, responding with a take that, while plausible-sounding, was actually illiterate.

“Republicans: Let Americans keep more of their own hard-earned money. Democrats: Take away 70% of your income and give it to leftist fantasy programs,” Louisiana Rep. Steve Scalise (R) tweeted over the weekend.

Americans for Tax Reform founder Grover Norquist piled on Saturday night. “Slavery is when your owner takes 100% of your production,” he tweeted. “Democrat congresswoman Ocasio-Cortez wants 70% (according to CNN). What is the word for 70% expropriation?”

Obviously, those things that Ocasio-Cortez actually proposes are fair game for debate, but one thing she has definitely never proposed is “taking away 70%” of anyone’s income or “70% expropriation.” In this case, Scalise and Norquist either do not understand how marginal tax rates work, or they are actively exploiting the public’s ignorance of the matter in order to deceive them. It’s hard to not infer the latter.

Knowledge of marginal tax rates should be a part of everyone’s basic civics education, but as it’s not, there’s no sense in shaming ordinary people for not knowing. Nevertheless, elected representatives and tax policy advocates are definitely two types of people who should absolutely know how marginal tax rates work.

No one tells you this (about tax brackets)

In order to get a handle on how marginal tax rates work, the first thing you need to understand is the concept of tax brackets. Here, via Forbes, are the current tax brackets for individual filers in 2019 (there are also three tax brackets for capital gains taxes):

There are currently seven brackets, defined by the amount of taxable income that an individual filer makes in a given tax year. What this chart shows is the rate of taxation that is applied to dollars within each of these brackets. For example, in the case of single filers, a 10 percent rate is applied to the first taxable dollar earned through the $9,700th taxable dollar. As soon as this tax filer pushes into the second bracket with their $9,701st taxable dollar, a 12 percent rate is applied to all income within that bracket.

The top bracket in 2019 applies a 37 percent tax rate to top earners, which range from married filers filing separately who earn at least $306,176 in taxable income to married filers filing jointly who earn $612,351 in taxable income. So, one of the things that would have to come to pass for Ocasio-Cortez to fund the Green New Deal in the manner she describes is that one or more additional tax brackets would have to be created, in order to facilitate applying a 70 percent tax rate on people earning more than a $10 millionth dollar of taxable income.

There are three things, then, that are important to know about this:

  1. What Ocasio-Cortez is proposing to do would only impact a small number of tax filers — those who earn at least $10,000,000 in taxable income. It’s fair to argue that this is a bad idea but it’s not correct to suggest she’s proposing some sort of blanket expropriation on “Americans,” generally speaking, as Scalise implies in his tweet.

  2. If you’re so fortunate to be making at least $10,000,000 in taxable income you’re also likely to be familiar with the bevy of tax breaks and loopholes available to you (or have access to tax professionals who do) that will end up limiting the amount of tax you’ll pay to far less than the proposed 70 percent rate.

  3. Most critically, that 70 percent rate of taxation doesn’t affect any dollar of taxable income but the $10 millionth and above.

Ocasio-Cortez isn’t the one trying to fleece you

The reason this third point is so critical is that one very common misconception about tax brackets is the idea that once a filer pushes into a higher bracket, that higher tax rate gets applied to all of that filer’s earnings, as opposed to just those dollars within that bracket. And so those who promulgate deceptions at the fringes of marginal tax rates often end up convincing people to do things that go against their financial interests, like turn down hard-earned raises in pay.

Back in 2011, USA Weekend (a sort of Parade-like weekend newsmagazine that used to be available to USA Today subscribers) published a since-deleted review of Laura Laing’s book, “Math For Grownups.” In the course of that review, its author, Gregory Connolly, made this terrible mistake:

That raise actually might not be as good as it looks. The extra money is nice, but it could very well bump you into the next tax bracket, possibly leaving you with less money than you had before the raise. Better benefits, such as medical, can save you money while keeping you in the same tax bracket.

This led Dean Baker of the Center for Economic and Policy Research to intercede with an important correction:

No, no and 286,000 times no! The tax system brackets give marginal rates. This means that if the raise bumps you into a higher bracket then you pay more taxes only on the income in the higher bracket. Suppose that the tax bracket for income under $200k is 25 percent, and for income over $200k is 33 percent. If you get a raise that pushes your income from $195,000 to $205,000 then you only pay the higher 33 percent tax rate on the $5,000 that is above the $200k threshold not your whole income. Therefore, there is no (as in none, nada, not any) way that getting more money, and being pushed into a higher tax bracket will leave you with less money after taxes.

Promoting the idea that Ocasio-Cortez’s tax proposal amounts to the wholesale seizure of everyone’s incomes may be the quickest and most effective way of scoring political points against her policy ideas, but it’s also downright predatory. Sowing these misconceptions can convince ordinary strivers to turn down life-changing raises in pay, or business owners to hold back on expanding their footprint or making new hires. It can lead some journalists to unwittingly spread misinformation, and force others to have to perennially contend with these errors.

In the end, there are going to be those who will not support Alexandria Ocasio-Cortez’s proposed Green New Deal. There will be others who will bitterly oppose the idea that this proposal be financed on the backs of the rich. But if there’s one thing that deserves to be remembered about this episode, it’s that Ocasio-Cortez made an honest attempt to level with the public about how she might finance the policy proposal. Her detractors, on the other hand, did not — and by spreading misinformation about marginal tax rates, they demonstrated that they had an added layer of contempt for the public in the process.

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Last Updated on Thursday, 10 January 2019 14:05


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+15 # BetaTheta 2019-01-10 14:40
We are shocked - yes, shocked! - to learn that the uber-wealthy and their minions in government are contemptuous of our intelligence.
+13 # dbrize 2019-01-10 14:56
This article is, when compared to our favorite Nobel prizewinner’s recent column, a “light to lighten the darkness”.

Unlike our Nobel prize winner, here we find coherent writing about marginal income tax rates but vastly more important, the reality that very few taxpayers would be in the 70% bracket, and even fewer (if any) will fail to avail themselves of numerous avenues to deductions and income shifts to avoid paying any of it. As they have done at all times in history.

What we learn from this in addition to the fact that the other side will of course demagogue the issue is this:

1. A 70% income tax bracket would generate little if any receipts.

2. Any progressive that understands taxation knows that the “rich” gain far more “riches” from capital gains and deductions than income. So...

3. If AOC, Krugman or anyone else is genuinely concerned that the “rich” pay their share, they should go after the capital gains tax and adjust some deductions.

My progressive friends would do well to ask why AOC, Krugman and the like want their political capital spent on a feel good income tax rate that won’t be paid instead of shining the spotlight where it actually hits the 1%, from where their riches come?
-3 # RMF 2019-01-12 01:09
Very odd to hear you smear Krugman's writing -- In contrast I have always found his writing to be easily understood, and I always learn something new, or a new way of thinking, about current economic issues discussed in his columns.

Admittedly though Krugman does tackle timely subjects of some complexity, so his writing does require, on the part of the reader, a degree of comprehension or foundation in economics, and it's therefore equally true that those requiring spoon-feeding should look elsewhere.

I see another problem with your comment -- you say "very few taxpayers would be in the 70% bracket." This is an empirical question determined by placement of the brackets, so a blanket statement about how many taxpayers might be in a particular bracket is statistically misplaced.

And you totally ignore tax equity and income distribution, which you may have noticed is widening to levels not seen since the robber barons (you may also recall what happened not long after, circa 1929.)

And you don't need to raise capital gains taxes so long as there is a robust estate tax system (the taxpayer cannot outlive the tax liability.)

But back to Krugman's column you criticize -- you don't exactly specify, but are probably offended because his latest column questions the wisdom of crack-pot libertarians, who claim (citing Milton Friedman among others) that much of the federal budget is wasted on things like regulation for pure food and safe drugs, etc.
+3 # dbrize 2019-01-12 15:02
In shorter version: you disagree with my position and claim ability to discern “subjects of complexity”.

Now let me allow that Krugman is a pretty sharp mathematical guy and some of his formulas require a higher degree of mathematics than I possess, but it’s my understanding that the NYT’s pays him to write, discernible columns stripping away some, ah, complexities so we less fortunate intellects might understand them.

If we must rely on you to interpret his intentions for us, he has obviously failed as a writer but more seriously in leaving his intentions to be defined by the ah, wrong “spoonfeeder.

Your opinions are acknowledged. Though your clairvoyance is mere quackery ad hominem at which you have the misfortune to excel.
-1 # RMF 2019-01-26 11:44
Say what???
-1 # RMF 2019-01-26 12:01
PS -- I also commented on substantive topics include in your post, to wit:

1. You say "very few taxpayers would be in the 70% bracket." This obviously is an empirical question determined by placement of the brackets, so a claim about who-is-in and who-is-out of the bracket is nebulous at best.

2. And you totally ignore the issue of tax equity/fairness across brackets, as well as the companion issue of worsening income distribution in US, and it's role in the Great Depression.

3. And you also ignored the point about capital gains rates relative to a robust estate tax, and the related effort of GOP to dismantle/repea l estate taxes.

Why did you ignore these substantive issues, even after being provided a simplified explanations, but instead preferring to pile on more smears against Krugman -- am I correct in thinking you fear debating substantive issues on their merits?

+4 # Rodion Raskolnikov 2019-01-11 09:38
There is a lot more to the problem than discussed here. The wealthy have tax accountants who manage their money so most of what they earn is tax deductible or tax deferred. Since their income is not a b-weekly paycheck or wage, they are able to define their incomes as money that is not taxed.

And most of the income in the $10+ class is capital gains which are taxed at a much lower rate than wages.

Let's face it. The rich who run the government made the decision a very long time ago that the middle and lower classes should pay the cost of government and the rich should reap the benefits of government. This was what the "gilded age" was all about and it was re-asserted by the neo-liberalism of Reagan, Thatcher, Clinton, and the Chicago School of Economics.

For me, the first step would be to treat all income the same. And all income earners, including corporations and individuals, would have the same rights of tax deduction. So if an attorney who charges his clients $2000 per hour can deduct a business lunch, so can I. There would be no separate tax tables for capital gains.

The tax system is corrupt, unfair, and anti-democratic . It needs a full revision. But I'm happy that progressives like AOC are talking about a start in the right direction. It won't happen in a short time frame.
+2 # dbrize 2019-01-11 12:59

I trust you will take this in the spirit intended.

Your “first step” is no matter how desirable, not going to happen and as such it is similar (forgive the sports analogy) to me saying the first thing I’d do with Major League Baseball is eliminate the designated hitter. Nice thought but ain’t gonna happen.

As for the “right direction”:

What you here propose is exactly what is usually done concerning issues like taxation. We “talk” about it. And the fact is, we have been talking about it for quite some time. AOC is introducing nothing that hasn’t been tried before, done before and proven to fail.

The rich have never paid high income tax rates. So how is wasting political capital, attention and time on this going to cause the “rich” to pay more of their “fair share”?

Warren Buffett has a salary of 100K per year, yet is one of the richest men in the world. Is an unlikely to be paid anyway 70% income tax rate going to get a “fairer share” out of him?

If we want the wealthy to pay more we need to put the attention and emphasis where it specifically belongs. Otherwise it’s “soak the rich” feel good bs that will be easily deflected, demagogued and evaded by the POB.

The rich should pay more, but they won’t if the spotlight shines elsewhere than where their wealth lies.
+2 # economagic 2019-01-11 14:28
"For me, the first step would be to treat all income the same. And all income earners, including corporations and individuals, would have the same rights of tax deduction. So if an attorney who charges his clients $2000 per hour can deduct a business lunch, so can I. There would be no separate tax tables for capital gains."

I agree, although since 80% or more of the population have no capital so no capital gains to deduct (likewise for numerous other categories), I'm not sure we should offer that "special privilege" to the few percent who do, and who also have the lawyers and accountants to do it.

But that's a picky detail. The point is that the tax system should be progressive, and if any group should be further privileged it should be those with the least means rather than those with the most.

Alternatively, it could be somewhat similar to Steve Forbes "flat tax" proposal except inverted: Tax most of HIS income and little of ours!
+4 # economagic 2019-01-11 14:20
I'm pretty sure Grover Norquist understands all this and is simply lying. But I strongly suspect that the reason Steve Scalise and many others make such allegations is that they truly do not understand what a "marginal tax rate" is. As the author shows, it is not rocket science, but it IS basic math, which many otherwise "successful" people simply fail to grasp.

Having taught basic math to college students (sic), including elementary education majors, I have a pretty good idea where the problem arises: People don't quite get it in elementary school, see no reason they should (especially with the advent of pocket calculators), so never learn it.

So why do so many fail to "get it" in the early grades?

People drawn to math and those drawn to teaching young children are almost "disjoint sets": no one is in both groups. "Basic math" today includes basic algebra--no more, but without that tool one is hard pressed to know which buttons to push on the calculator and how to recognize when the displayed result could not possibly be right.

In my experience, one never really understands the math just learned until one takes the next course in the sequence, right up through calculus and more abstract topics. Since many El Ed majors struggle with basic algebra and few take any further math, most are teaching problem solving ("The Dreaded Story Problem") by rote and their own intuition, blissfully unaware of how those who DO "get it" go about it.
0 # lfeuille 2019-01-11 17:51
How can they not understand what a marginal tax rate is? Don't they have to file their own taxes?
0 # economagic 2019-01-12 17:06
Filing a tax return, even a full 1040 with the extra forms and schedules, does not require any knowledge of the marginal tax rate, either the definition or the math. One simply ("simple for Leonardo"!) follows the instructions to add this, subtract that,and multiply by 3.14159. . . .
0 # Wise woman 2019-01-12 02:43
Call me uninformed! I took math through trig and have always done my own taxes, but if memory serves me correctly (haha), I don't ever remember hearing the term "marginal tax rate." What is it you smart math/economists ? BTW what happened to the rich guys during the Eisenhower administration when their tax rate was something like 90%? Did they duck it?
-4 # economagic 2019-01-12 17:12
Nope, they had to pay it--less all deductions and exceptions due to loopholes.

As for the marginal rates, they are the percentages in the first column of the table above for the income ranges in the other columns for those four "filing statuses" (single, married, etc.). The first sentence below "Ocasio-Cortez isn’t the one trying to fleece you" (in bold font) explains it pretty well.
0 # RMF 2019-01-26 12:14
"Marginal" means next. For ex, if the 70 percent bracket started at an income of $500,000, and you earn $501,000, then only the marginal 1000 dollars would be taxed at 70 percent. The balance of your 500,000 income would be taxed at lower rates per the tax bracket schedule.