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Thu Jan 10, 2019, 03:45 PM

How tax brackets actually work: A simple visual guide


In a recent “60 Minutes” interview, Rep. Alexandria Ocasio-Cortez (D-N.Y.) proposed raising the federal tax rate on incomes above $10 million up to 70 percent. The move would affect less than one-tenth of 1 percent of U.S. households and return the top marginal tax rate to its 1980 level.

Merits of the proposal aside, the resulting debate in Washington has underscored the fact that many Americans do not understand how federal income tax brackets work. Several policymakers and low-tax advocates suggested, incorrectly, that a top rate of 70 percent would affect all income earned by certain earners.

These distortions are rooted in the common belief that a single federal income tax rate applies to a person’s entire annual income. Under this misbelief, that tax rate is determined by how much a person makes in a year. This is often reflected in how people talk about their taxes, saying things like “I’m in the 24 percent tax bracket” or “I’m in the 12 percent tax bracket.”

This is why it’s not exactly correct to say things like “I’m in the 22 percent tax bracket.” Think of it this way: Tax brackets apply to income, not to individuals. The same 10 percent rate applies to the first $9,525 earned whether the earner makes $50,000 in a year or $5,000,000.

So in the coming weeks, if you hear a talking head suggest that a top tax rate of 70 percent means that the government will be taking away 70 percent of a person’s earnings, it’s a sign that the speaker either doesn’t understand how taxes work or is deliberately trying to mislead you.

I had my doubts on this too until a few years ago. Too many folks on TV and online are deliberately spewing lies about how this works to make it seem like liberal Dems are going to tax us to death. The truth is much more reasonable.

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