The highest income tax rate is 39.6 percent. A single person pays that on taxable income over $450,050. A couple pays it on income over $466,950. Earn another $1,000 and the U.S. Treasury claims $396 of it.
Only 1 percent of households pay anything like that rate. So the other 99 percent of us don’t face such punishment, right?
Wrong. Our tax system is a despicable, stinking swamp. It is quite possible for a person who earns far less than $450,000 a year to experience an effective tax rate that is higher than 39.6 percent. Indeed, you can be a worker at the edge of having a living wage and pay taxes at a higher rate than someone in the top one percent.
Don’t believe me? Pay attention. I will demonstrate.
The issue here is what economists call the marginal tax rate. It’s not the average tax rate. It’s not the total tax bill. It’s what a worker will lose to taxes and required payments when she earns additional money.
The cause of the problem is simple. While our politicians argue passionately about federal income tax rates, the reality is that we face a mash-up of several kinds of taxes or required payments on income. You can see how ridiculous our system is by considering the tax burden on a worker who earns $15 an hour and has the good fortune to work 2,000 hours, bringing in $30,000 a year.
—The first tax to be paid is the employment tax, 15.3 percent for an independent worker. (Some will say that the tax rate is half of that, 7.65 percent, because employers nominally pay half, but the reality is that it is called an employment tax for a reason— it is a tax on labor.)
— The second tax is the federal income tax. A single worker gets $10,350 tax-free due to the $6,300 standard deduction and $4,050 personal exemption. The next $9,275 is taxed at 10 percent. The remaining $10,375 is taxed at 15 percent. That gives a tax bill of $2,484, an average rate of 8.2 percent. Additional income is taxed at 15 percent. Add the two taxes and you’ve got a marginal rate of 30.3 percent.
But that’s not all. The same worker must also buy health insurance. Without a subsidy it would cost $265 a month. That $30,000 a year income level, however, gets a premium subsidy of $57 a month.
Now let’s see what happens when that worker earns another $100 a month. As before, the worker will pay 15.3 percent in employment taxes and a federal income tax of 15 percent on the additional income. But the workers’ health insurance subsidy drops to $41 a month, a loss of $16 a month. That, in effect is an additional “tax” of 16 percent.
So the worker earns an additional $1,200 a year— but 46.3 percent is immediately lost to basic government costs. Meanwhile, that top end worker pays at 39.6 percent because the employment tax is far behind and the full health insurance rate was paid long ago. What the high-income worker experiences is a 39.6 percent marginal tax rate. What the lowe- income worker experiences is a 46.3 marginal percent tax rate
So let’s ask a question: What are the remaining candidates for President proposing to do about this absurdity?
You can compare candidate platforms on the Tax Foundation website. Visit and you will find that four of the candidates want to dicker around with current income tax rates.
Clinton and Sanders, predictably, want to raise income tax rates on higher incomes. Sanders would even have two new brackets that exceed the 46.3 percent rate the $30,000 worker pays. Kasich and Trump, equally predictable, want to reduce income tax rates.
These candidates are not proposing real change. They are offering to drain, or fill, different areas of the stinking swamp. They are still playing three-card monte with a voting public that never wins. And our tax system will still be a stinking swamp.
Only one remaining candidate advocates fundamental change. He proposes a radical and simple flat tax with a big deduction. More importantly, he wants to replace the employment tax with a value-added tax. The largest tax most workers pay would no longer be taken from paychecks.
That candidate is Ted Cruz. He’s talking about a fundamental change in an intolerable system. Is anyone listening?
On the web:
Tax Foundation: 2016 Tax Brackets
http://taxfoundation.org/article/2016-tax-brackets
Tax Foundation: Compare Presidential tax reform proposals
http://taxfoundation.org/comparing-2016-presidential-tax-reform-proposals
Kaiser Family Foundation Health Insurance Subsidy Calculator
http://kff.org/interactive/subsidy-calculator/
Scott Burns, “Don’t Dismiss Rand Paul’s Tax Plan,” 7/3/2015
https://assetbuilder.com/knowledge-center/articles/dont-dismiss-rand-pauls-tax-plan
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(c) Scott Burns, 2020