It’s become a familiar line since Obama took office. Some $news_org will interview a high-earner to say something really fucking stupid like “I’m gonna make sure we don’t make more than $250,000 so we don’t have to pay higher taxes!”
These people are stupid, stupid, stupid, because they apparently have no idea how they’re taxed, and how incremental, graduated tax systems work. If the top tier starts at $250,001 of income, and somehow Obama gets a tax hike passed on that bracket such that the new rate is 50%, it doesn’t affect the taxes paid on the first $250,000 of income at all. The top tax bracket applies ONLY to the dollars earned over $250K.
On more than one occasion, I’ve received an e-mail asking for advice on how to keep from slipping up into the next tax bracket. The motivation behind such e-mails is typically a misconception of how our progressive tax system works. What many people don’t realize is that our federal income tax brackets reflect marginal rates, not a rate that is applied to your entire income. Here’s a quick example based on current income tax rates…
For a married couple filing jointly in 2008, the 10% tax bracket covers income from $0 to $16,050. From $16,050 to $65,100 the tax rate is 15%. And from $65,100 to $131,450 the tax rate is 25%. A couple with a taxable income of $100k will be in the 25% tax bracket, but they won’t have to pay 25% in federal income taxes on the full amount. Rather, they’ll pay just 10% on the first $16,050, 15% on the next $49,050, and 25% on the last $34,900. This works out to $17,687.50, or an effective rate of just under 18%.
It IS true that, as income increases over the top stated bracket (over $388,350 in 2012), more and more of one’s income is subject to the highest bracket. Someone with an adjusted gross income of $390,000 pays the top rate on less than $2,000 of income, but someone earning $10,000,000 pays the top rate on nearly all their income. (This is not a bug.) But even at that level, they’re richer for every dollar earned; there’s no sense in curtailing or limiting income under the current US tax code.