Marginal Tax Brackets

[tongodeon]

In yesterday's post about Joe The Plumber, mmcirvin set me straight about something that I have been totally wrong about for a very long time, and I expect that others might be mistaken about. Consider the following (extremely simplified) tax brackets

Comments

[jsbowden]

This is correct. You cannot make LESS with more income. You are taxed at the rate within each bracket. Everyone pays the same amount (excluding things like shelters, AMT, capital gains, EITC, etc) on each dollar they make within each bracket.

[cdk]

That's it exactly. The main legitimate reason to ever say "that would put me in a higher tax bracket" is if it's a type of income you can assign to your family members who are in a lower bracket even with the additional income, or a type of income you can defer to another year when your other taxable income will be lower. Other than that, the phrase is mostly meaningless, because as you explained, going $1 into a higher tax bracket just means you'll pay $.35 out of that dollar instead of $.33. I blame the overuse and misuse of that phrase for the common misunderstanding of how income is taxed.

Ah yes....

[drieuxster]

Glad to see you understand how the tax system actually works.

But the problem now is how to get more americans to understand this part of the process, without also advocating the utility of things like Education, Math, reasoning...

[cactusthesaint]

It always amazes me how widespread this misconception is.

Of course, it's in the best interests of whichever party isn't raising taxes to perpetuate the misconception.

[mmcirvin]

I was considering making a whole separate post about that, because it seems to be a really common misconception. You saved me from doing it.

You can tell it's not true just by looking in the tables that come with the 1040. There isn't a huge jump in the tax when you cross a boundary. However, I guess it would take a certain amount of study to ascertain that.

If you make enough money that you fall off the high end of the table, and you're filing manually, they actually describe the calculation you have to do to calculate your tax, and it becomes more apparent that it works this way.

It seems to me that this is actually a better comeback than grousing about Joe the Plumber's family connections or party affiliation.

[mmcirvin]

Note, too, that $250,000/yr is WELL off the top of the table.