A couple of good recent diaries have highlighted a subject that has been near to my heart for years now. Through no real fault of their own, many (most) people on both the right and the left have a basic misconception about how a progressive tax system operates. People routinely confuse the highest marginal rate with the “effective” rate, (i.e. the percentage of one’s total income paid in tax), and therefore overestimate how much they are paying and actually fear moving into a higher bracket.
This misconception has been fostered and encouraged by the anti-tax crowd, aided by the cluelessness of most of the media. High on progressives’ to-do list should be a serious media campaign to educate the public on how marginal rates work. I firmly believe that such a campaign done well, including some slick TV ads, would greatly increase public support for progressive tax policy.
See more below.
The tax rate you most often hear mentioned in the media is the highest marginal tax rate. Listen carefully, everybody: the highest marginal rate does NOT, repeat NOT, apply to your entire income. It applies only to the amount earned above the kick-in threshold.
Brainwrap provides an excellent explanation of this, with examples: http://www.dailykos.com/...
See also Jed Lewison: http://www.dailykos.com/...
The misunderstanding of this simple point has been one of the primary barriers to public acceptance of a progressive tax system. The anti-tax crowd foments this misunderstanding since it serves their purposes. They would like you to believe that you might wind up working harder and keeping less money because you move into a higher bracket. This is totally bogus. It simply cannot happen because of how marginal rates operate.
If you were not aware of this, don’t feel bad. I make this point whenever the subject comes up and I find the misunderstanding to be rampant in every political, social, economic, and educational demographic.
The top marginal rate is not the same as the “effective” rate, which is the percentage of your total income that you pay in tax. You can calculate your effective Federal income tax rate very easily. Simply pull out your 2011 1040 return (I hope you saved a copy) and go to line 61 on page 2, which shows your “total tax.” Divide this number by line 37 on page 1, your “adjusted gross income,” then multiply by 100 to convert to a percentage. If you used the 1040EZ form, divide line 10 by line 6.
My effective Federal tax rate last year was 21.8 percent, and I am in a comfortable two-income household; we are probably in the top two-percent. When I ask people to estimate how much of their income they are paying in Federal income tax, they invariably guess a third or more. I suspect only a tiny percentage are actually paying an effective rate higher than 22 percent and most are paying considerably less. *
The other side doesn’t want people to understand how taxes work. They are delighted to have people overestimating how much Federal income tax they pay. They benefit from the fear people have that they could lose money by moving into a higher bracket, even though this fear is illusory. If our side wants to increase public support for a fair progressive tax system, we need to educate people on this point.
I can’t think of a better use for our side’s financial resources right now than to embark on a sophisticated media campaign just to make the point that these top marginal rates only apply to the top segment of one’s earnings. A few well-crafted TV spots by the folks who brought us Obama’s ads could surely make the point, and could help us solidify a strong majority for the goals of progressive government.
*(There are, of course, payroll, state, and local taxes. But the issue of the moment is the progressivity of the Federal income tax system. That's what the "fiscal cliff" negotiations are all about. If you want to determine your full effective tax rate, add your payroll, state, and local taxes to Federal and divide by adjusted gross income.)