5 ms·

Someone enlighten me, how can the author talk about a marginal tax rate for the entirety of ones income? Isn't a marginal rate by definition the rate which app

Someone enlighten me, how can the author talk about a marginal tax rate for the entirety of ones income? Isn't a marginal rate by definition the rate which applies to earnings above a specific benchmark (thereby providing no disincentive to cross it)?

btilly 16y ago
The author didn't do that. Instead he reported on research that found that the effective marginal tax rate across a broad range of incomes and life situations was generally close to 40%. So no matter what your income, your marginal tax rate is probably close to 40%.
- deleted 16y ago
  [deleted]
- houseabsolute 16y ago
  To put it simply: if you earn a dollar more of income, about forty percent of that dollar will end up going to the government.
  - brc 16y ago
    Or, in other words, in a 5 day week, Monday and Tuesday you work for the government. Wednesday through Friday is for yourself.
    - houseabsolute 16y ago
      No, that's not right, because the dollars you are already earning might not be taxed at the marginal rate.
tbrownaw 16y ago
If your marginal tax rate is approximately constant, then it will also approximately equal your overall ratio of tax/income. So even though the article doesn't seem to be particularly careful with the difference, it doesn't really matter in this case.
- _delirium 16y ago
  The numbers don't add up to the macro numbers, though--- the governments at all levels added together pull in about 25-30% of U.S. GDP in taxes, not 40%. One thing throwing off his numbers is that he assumes all income to be ordinary income, whereas a large proportion of Americans' income, especially at the high end, get classified as capital gains or qualified dividends, which are taxed at lower rates. I believe Warren Buffett calculated that his real tax rate was 18%, for example.
  - camiller 16y ago
    I make considerably less than Warren, and virtually none is capitol gains. After home mortgage deduction, charitable deductions, etc. My effective federal tax rate was like 7.2% (If I remember what TurboTax told me correctly). The previous year it was 6.9%. My marginal federal bracket rate is 28% ($82,400-171,850). Warren really like to talk that crap up about how he pays less taxes than his secretary. To me his secretary just needs a better tax guy.
    - Retric 16y ago
      Are you forgetting about the 12.4% you pay to SS? How about 2.9% to Medicare? Now let's add in sales and property taxes etc. PS: Relative to his income his sales and property taxes are well under 0.1%.
CWuestefeld 16y ago
The "marginal" think really does throw this off. The "marginal rate" means the amount you'll be taxed for the next dollar you earn. So this tells us little about the rate that each person already paid for the amount below the margin, the "body" of earnings, if you will. Actually, the more I think about it, the more I think that the idea of a flat marginal rate is a good thing: that means there's little disincentive to produce more. I would have thought that a flat marginal rate with a curved "body" rate would be darned near impossible to implement, but this makes it sound like that's been fairly successful. Of course, the fact that the marginal rate is 40% is a very bad thing. The government should not make up a plurality of our spending.
- waqf 16y ago
  A flat marginal rate with a curved average rate certainly is impossible: http://en.wikipedia.org/wiki/Fundamental_theorem_of_calculus http://en.wikipedia.org/wiki/Fundamental_theorem_of_calculus
  - CWuestefeld 16y ago
    The theorem only works for continuous functions. Tax rates are anything but continuous. They have sharp elbows (e.g., AMT), and some taxes wink into existence and back out again within a finite range (e.g., EIC). I'm not sure that these exceptions are sufficient to allow it to work out, but I'm pretty sure that this rule isn't the impediment.
    - cynicalkane 16y ago
      Then the marginal rate must be flat except for discontinuities. It will effectively not be a flat marginal rate except for finite intervals. And if the tax burden is meaningfully curved, the tax rate must have discontinuities in meaningful places.
  - orangecat 16y ago
    Wouldn't a completely flat tax with a fixed deduction/rebate achieve that? Say, 25% of your income minus $10k. The marginal rate is always 25%, the average rate is negative for incomes below $40k and asymptotically approaches 25% as it increases.

btilly 16y ago

The author didn't do that. Instead he reported on research that found that the effective marginal tax rate across a broad range of incomes and life situations was generally close to 40%. So no matter what your income, your marginal tax rate is probably close to 40%.

deleted 16y ago
[deleted]
houseabsolute 16y ago
To put it simply: if you earn a dollar more of income, about forty percent of that dollar will end up going to the government.
- brc 16y ago
  Or, in other words, in a 5 day week, Monday and Tuesday you work for the government. Wednesday through Friday is for yourself.
  - houseabsolute 16y ago
    No, that's not right, because the dollars you are already earning might not be taxed at the marginal rate.

tbrownaw 16y ago

If your marginal tax rate is approximately constant, then it will also approximately equal your overall ratio of tax/income. So even though the article doesn't seem to be particularly careful with the difference, it doesn't really matter in this case.

_delirium 16y ago
The numbers don't add up to the macro numbers, though--- the governments at all levels added together pull in about 25-30% of U.S. GDP in taxes, not 40%. One thing throwing off his numbers is that he assumes all income to be ordinary income, whereas a large proportion of Americans' income, especially at the high end, get classified as capital gains or qualified dividends, which are taxed at lower rates. I believe Warren Buffett calculated that his real tax rate was 18%, for example.
- camiller 16y ago
  I make considerably less than Warren, and virtually none is capitol gains. After home mortgage deduction, charitable deductions, etc. My effective federal tax rate was like 7.2% (If I remember what TurboTax told me correctly). The previous year it was 6.9%. My marginal federal bracket rate is 28% ($82,400-171,850). Warren really like to talk that crap up about how he pays less taxes than his secretary. To me his secretary just needs a better tax guy.
  - Retric 16y ago
    Are you forgetting about the 12.4% you pay to SS? How about 2.9% to Medicare? Now let's add in sales and property taxes etc. PS: Relative to his income his sales and property taxes are well under 0.1%.

CWuestefeld 16y ago

The "marginal" think really does throw this off. The "marginal rate" means the amount you'll be taxed for the next dollar you earn. So this tells us little about the rate that each person already paid for the amount below the margin, the "body" of earnings, if you will. Actually, the more I think about it, the more I think that the idea of a flat marginal rate is a good thing: that means there's little disincentive to produce more. I would have thought that a flat marginal rate with a curved "body" rate would be darned near impossible to implement, but this makes it sound like that's been fairly successful. Of course, the fact that the marginal rate is 40% is a very bad thing. The government should not make up a plurality of our spending.

waqf 16y ago
A flat marginal rate with a curved average rate certainly is impossible: http://en.wikipedia.org/wiki/Fundamental_theorem_of_calculus http://en.wikipedia.org/wiki/Fundamental_theorem_of_calculus
- CWuestefeld 16y ago
  The theorem only works for continuous functions. Tax rates are anything but continuous. They have sharp elbows (e.g., AMT), and some taxes wink into existence and back out again within a finite range (e.g., EIC). I'm not sure that these exceptions are sufficient to allow it to work out, but I'm pretty sure that this rule isn't the impediment.
  - cynicalkane 16y ago
    Then the marginal rate must be flat except for discontinuities. It will effectively not be a flat marginal rate except for finite intervals. And if the tax burden is meaningfully curved, the tax rate must have discontinuities in meaningful places.
- orangecat 16y ago
  Wouldn't a completely flat tax with a fixed deduction/rebate achieve that? Say, 25% of your income minus $10k. The marginal rate is always 25%, the average rate is negative for incomes below $40k and asymptotically approaches 25% as it increases.