Understanding US Tax Rates

Check out the table below.

Year 2012 income brackets and tax rates

Marginal Tax Rate[6] Single Married Filing Jointly or Qualified Widow(er) Married Filing Separately Head of Household
10% $0 – $8,700 $0 – $17,400 $0 – $8,700 $0 – $12,400
15% $8,701 – $35,350 $17,401 – $70,700 $8,701 – $35,350 $12,401 – $47,350
25% $35,351 – $85,650 $70,701 – $142,700 $35,351 – $71,350 $47,351 – $122,300
28% $85,651 – $178,650 $142,701 – $217,450 $71,351 – $108,725 $122,301 – $198,050
33% $178,651 – $388,350 $217,451 – $388,350 $108,726 – $194,175 $198,051 – $388,350
35% $388,351+ $388,351+ $194,176+ $388,351+

An individual’s marginal income tax bracket depends upon his or her income and tax-filing classification. As of 2008, there are six tax brackets for ordinary income (ranging from 10% to 35%) and four classifications: single, married filing jointly (or qualified widow or widower), married filing separately, and head of household.

An individual pays tax at a given bracket only for each dollar within that bracket’s range. For example, a single taxpayer who earns $10,000 in 2012 will be taxed 10% of each dollar earned (after deductions and allowances) from the 1st dollar to the 8,700th dollar (10% × $8,700 = $870.00), then 15% of each dollar earned from the 8,701st dollar to the 10,000th dollar (15% × $1,300 = $195), for a total of $1,065. Notice this amount ($1,065) is lower than if the individual had been taxed at 15% on the full $10,000 (which would result in a tax of $1,500). This is because the individual’s marginal rate (the percentage tax on the last dollar earned, here 15%) has no effect on the income taxed at a lower bracket (here the first $8,700 of income taxed at 10%).

I don’t believe that many people really understand how this works as explained above. The terminology and phrases used by the media give the wrong impression. The media give the impression that with an income in the 35% tax bracket, all of it is taxed at 35%. Not true! When Obama says that he wants to let the Bush tax cuts expire for those making more than $250,000, what he means is that the tax cuts would expire for those making more than $250,000 AND ONLY FOR THE PORTION OF THAT PERSON’S INCOME ABOVE  $250,000. That means if a person (or couple, or business) earns $251,000, then only $1,000 would be taxed at pre-Bush rates! The rest of it would still benefit from the Bush tax cuts.

In other words, even under Obama’s proposal, EVERYONE still gets to keep the Bush tax cuts for every dollar a person makes below $250,000.

Raising tax rates for people of higher incomes is eminently fair, because the marginal tax rate system we have truly treats everyone the same. Higher tax rates for the portion of people’s incomes above certain levels have historically produced good economic results: more revenue coming in, less government spending going out, a more level playing field, less deficit (and sometimes a surplus), and other pluses.

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