Clarifying what the “Marginal Tax Rate” is, and is NOT

The other night at dinner I was sitting beside a man (talking very loudly) who said he could never vote for Bernie Sanders because Bernie wanted to raise taxes to 90%.  I believe his quote was on the lines of “…so I’m supposed to work each week and have Bernie take 90% of my paycheck?  No way!”.  That would be something to be mad about, fortunately though, this man had no idea what he was talking about.  It was, yet again, an error in understanding what a “Marginal Tax Rate” is with regards to income taxes.  Neither Bernie, the IRS, or the Easter Bunny were going to take 90% of this (loud) man’s paycheck.

Just to clarify, I’m not voting for Bernie Sanders in our state’s Democratic Primary.  I don’t technically have any “skin in the game” with hopes that this man will vote for Bernie.  I do however take issue with willful ignorance, and regardless of who the gentleman is voting for, I fully believe he should base his decision off of facts and not some anecdotal talking point he got from a misleading source.

In America we have a progressive tax system.  This basically means that as you earn more you will pay higher taxes on the “next dollar earned” in an increasingly staggered tax bracket.  The “next dollar earned” is where the term “marginal” comes into play.  It appears what confuses many Americans is that they know that they make “X” dollars, they look at an income tax chart, find where that falls, and assume ALL of their income is taxed at that rate.  This is simply not true.  Here is a visual that should be able to help explain:

progressive tax

What this means is that you, me, and your angry Uncle Joe, all pay 10% for the first $8,350 we make, 15% on the next amount up to $33,950, etc, etc…  This picture comes from a great article that does a much better job of explaining the Marginal Tax Rate than I can.  It should take you all of two minutes to read so I recommend highly checking it out.  It also dispels another myth you hear frequently, the “…I turned down that other job because it paid more, but my take-home pay would have been less because it bumped me into a higher tax bracket”.  Yes, like the above example, this is equated to three-headed unicorns crapping fairy dust.  It’s just not true because, it also, looses sight of the “marginal” component of our tax rate.

One last point, we have to remember that the greatest expansion of the middle-class in this country, in which we had the longest sustained period of overall economic growth, came during a time when our marginal tax rate was above 90%.  In today’s terms that means families making about $3.5 Million dollars or more (in income) would be impacted…and remember our lesson from above; they, you, and me, all pay the EXACT same tax on the first $8,350, and so on and so on…  Also, keep in mind, families making that kind of money are normally earning that amount in capital gains, not working income tax (meaning, they are making most of their money off of investments which is taxed at a much lower rate).  If you’d like to look for yourselves with regards to past marginal tax rates, here is a link to that information.

I hope this helps clear up some of the myths and misconceptions that are associated around income tax here in the United States.  I have always believed that the most powerful force in any election is an informed electorate.  Also, voting is the most fundamental piece to a democracy’s foundation.  While there are those out there who want to make it harder for citizens to vote, remember that we must all remain steadfast, and exercise our most fundamental task – Go VOTE!

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