#1: How Progressive Tax Rates Work

The Myth & Misconception: Under our system of progressive income tax rates, the highest tax rate that you reach becomes the tax rate for all of your income.

Wrong! You never lose the benefit of the lower tax rate when some of your taxable income becomes taxed at a higher rate.

Let’s look at this example:

Tax rates today progress from 0 – 10% – 15% – 25% – 28% – 33% – 35% as taxable income rises. This year, Nancy, a single taxpayer whose income is all from wages, will reach the 35% rate when her taxable income exceeds $357,700.

What will Nancy pay if she has $358,700 of taxable income? She will pay the 35% rate on only that top $1,000. Her other taxable income benefits from the lower rates:

Taxable Income   Tax Rate
Up to $8,025 10%
$8,026 to $32,550 15%
$32,551 to $78,850 25%
$78,851 to $164,550 28%
$164,551 to $357,700 33%
Over $357,700 35%

That’s why her total tax is $104,142, which is 29% of her taxable income, not 35%.

Much of the hostility to progressive tax rates stems from this widespread M & M.

 

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