We all know the tired argument played over and over again. "Taxes are bad!!" or "You can't tax the high wage earners, trickle-down economics!"
Well, I decided to see how full of crap these arguments were for myself, and also to have a little ammunition in our discussions with the truly red party.
Just to start off, here's a little nugget. For the year 2007, those who are married filing jointly pulling in over (and under) $200,000 of adjusted gross income (AGI):
-For the year 2007-
Earners over $200k AGI: 3,627,929 (9.6%)
Under $200k AGI: 37,846,033 (90.4%)
(source: IRS Taxstats for 2007)
If we include married filing separately, or heads of household, the percentage of earners over $200,000 AGI drops further. But we'll focus on this for now.
More discussion after the jump!
So a quick run down of the American tax system is in order. We have a progressive system, meaning that up to a certain amount you are taxed at the lower rate. Once you make a single dollar over that amount, you will pay the higher rate on that dollar ONLY. Why people don't understand this is beyond me.
Rate: Single Married (joint)
10% Bracket $0 – $8,375 $0 – $16,750
15% Bracket $8,375 – $34,000 $16,750 – $68,000
25% Bracket $34,000 – $82,400 $68,000 – $137,300
28% Bracket $82,400 – $171,850 $137,300 – $209,250
33% Bracket $171,850 – $373,650 $209,250 – $373,650
35% Bracket $373,650+ $373,650+
(source :Bargaineering- Tax Brackets)
So, without considering deductions whatsoever, the effective tax and tax rate for a family (married filing jointly) would be about $60,321 and 24.13%. It sure sounds better to say that they are taxed at 33% though, huh?
The standard deductions though for this family:
$11,400
(source :Bargaineering Tax Rates)
$250K AGI
Ok, so thats a little less. But is a family making $250,000 going to suffer if their tax rate is raised? Let's look at the taxes as of today. To make this fair, we'll include the payroll tax in this equation.
$250,000
-$60,321
-$6,262 (6.2%, but a max of $6,621.60)
--------
$183,417, after all taxes are deducted (but with NO deductions).
But let's say that housing is required. If this family was responsible, they should have no more than a third of their AGI in a mortgage
$183,417
-$82,500 ($250,000 * .33)
--------
$100,917
So, with approximately $101,000 to use for food, clothing, and any other discretionary purposes, our family seems to be pretty well off. I'm going to leave out other 'must-haves' such as health insurance, car insurance, etc, because the costs will be about the same for all tax brackets.
Then the question comes up about small business owners. Well, because of our tax structure, if you are a sole proprietorship, you can file as an individual (or have it as family income). The payroll tax will rise to 7.65% - but this is only on net earnings. I won't do the calculation, but it will roughly be the same as our family above. Keep in mind though that there are deductions available for practically every business expense- and also, if you have earnings over this amount, you should really look into forming an LLC or incorporating.
$100K AGI
For a family with $100,00 of income (a vast majority falls UNDER this threshold too), the tax and tax rate is $17,375 and 17.38%, but is at the 25% bracket.
$100,000
-$17,375
-$6,200 (6.2%, but a max of $6,621.60)
--------
$76,425, after all taxes are deducted (but with NO deductions).
Let's factor in housing again.
$76,425
-$33,000 ($100,000 * .33)
--------
$43,425
Our fairly upper-middle class family has $43,425 for all of their other expenses. This is still approximately 2.3x less than the family with AGI of $250,000 (the ratio still holds, basically).
RAISING THE BAR
Here's where we'll do our final analysis: The effects of raising the tax bracket of the $250,000 family up to 36% (from 33%).
conclusory argument re: 250k vs 100k income
Tax on $250,000 up to $208,850: $47,650
Tax of 36% on remaining amount: $14,814
Total: $62,464
So, drumroll please... We're looking at a $2,100 increase for those sitting "on the cusp". This is assuming, though, that we keep the brackets the same. If the brackets are moved so that those making up to $250,000 are not taxed at the new rate, much less than 10% of the population will have their taxes raised at all.
And honestly, I don't feel sorry for you if you have to pay a little more when the rest of the country is having a hard time finding work at all.
If this helped you, feel free to share it with friends, left or right. I'm not a finance guru, so if there's anything wrong or whatever, let me know!
P.S.: Just for kicks, to see Reaganomics' effects on our national debt, search for a graph of our tax rate here and the national debt here. Aahh... failed policy.