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#1 A perfect example of how DU people just do not get it
 Join Date
 Jun 2008
 Location
 NC
 Posts
 248
07022011, 02:46 PMhttp://www.democraticunderground.com...ss=439x1402173
ThomWV (1000+ posts) Sat Jul0211 08:53 AM
Original message
No one pays 35% in income taxes, that is a Marginal rate
its true that the marginal income tax rate is 35% it does not mean for a second that the person paying it pays income tax at the rate of 35%, in fact it is impossible for them to pay at a rate of 35%.
First we have a low earner, in our case a person making $10,000 per year. They are in the 5% tax bracket and so their tax due is $500.
$10,000 Income x 0.05% Tax Rate = $500 Tax Due
Next we have our middle income earner ($35,000 per year), here with an income of $35,000. In this case our earner is in the 20% tax bracket but that does not mean that our earner will pay at that rate for their entire income:
First $20,000 x 5% = $1,000 +
Next $15,000 x 20% = $3,000
$4,000 Tax due 11.4% of the total income of $35,000  this is their "effective tax rate")
Finally we have our high earner, with $75,000 of income. Here is what they owe:
First $20,000 x 5% = $1,000 +
Next $30,000 x 20% = $6,000
Final $25,000 x 35% = $8,750
$75,000 $15,750 Tax due (21% of the total income of $75,000  this is their "effective tax rate")
As you have already figured out in any progressive tax system that uses marginal rates it is impossible to ever owe taxes at the highest rate. Note that this does not include and special deductions to income, which greatly benefit those with higher incomes, it only points out that when you hear Republicans claim that the rich are being soaked because they have to pay taxes at a 35% rate is just more nonsense. In the example above our high earner, who pays at the 35% marginal rate does, in truth, only pay our 21% of their income in taxes. The same is true in our system.
Let's just say in Thom WV little tax situation that everybody gets a personal deduction of $2,000 and a standard deduction of $5,000. also note that these deductions are phased out as your income gets higher. so lets say the $5.000 standard deduction in our little exercise get reduced by 2% for every dollar over $70,000 that is earned and our little exemption of $2,000 also get reduced by 2% for every dollar over $70,000
so now let's look at the $10,000 earner
$10,000 $5,000 $2,000 = $3,000 of taxable income * a 5 % tax rate equals a tax of $150.
10,000/ 150 = a tax rate based on income of .015%
also note this person gets to keep 10,000/10,000150= 10,000/9,850=98.5% of the cash they bring home from work. keeping 98.5% of all the cash i work for is a great incentive to work don't you think?
$35,000 earner:
$35,000$5,000$2,000= $28,000 of taxable income
taxed as follows:
first $20,000 @ 5%= $1,000
addiitonal $ 8,000 @ 20% = $1,600
total tax $2,600. a tax rate based on income of $35,000/$2,600=.074
(note 35,000 is 3.5 times as large as 10,000 however this 2nd taxpayer pays 7 times when stated as a percentage of income.)
also cash kept 35,00035,0002,600= 35,000/32,400 = 92.5 % of cash earned is kept by this taxpayer. Still a good incentive to work but not as good as our first taxpayer.
now our 3rd taxpayer: $ 75,000
calculate the phase in of both personal exemption and standard deduction
75,00070,000= 5,000 * 2%= $100 so standard dedection equals $ 5,000 $ 100=$ 4,900
75,00070,000=5,000 * 2%=$100 so personal exemption equals $2,000$100=$1,900
75,000(5,000+2,000)=68,000 + 200= 68,200 in taxable income
20,000 @ 5%= $ 1,000
15,000 @20% = 3,000
68,200 35,000=33,200 @ 35% 11,620
total tax = 1,000 + 3,000 + 11,620 = $15,620
a tax rate based on total income of 75,000/15,620= 20.8 %
75,00015,620=59,380 or 75,000/59,380 = 79.1 % of the cash this earner works to earn is kept for himself. keeping 79% is a substantial amount less then 98% in terms of incentives to work.
with phase out rules and alternative minimum tax rules is is very possible that someone can pay an amount equal to the highest marginal rate in taxes as stated as a percentage of income.
lFreakinDJ 1. After DEDUCTIONS $Millionaires pay less then 17%
Then more you make the more deductions you can benefit from
so the 75,000 earner pays $ 5,000 in interest to the bank during the year and also has to pay $3,000 in real estate taxes. Remember this is $5,000 and $3,000 in cash really going out of his checking account in check payments:
75,000  $1,900 in personal exemption (as calculated above)
5,000 + 3,000 less $100 phase out = $7,900 in deductions
Tax
75,000 $1,900$7,900= $65, 200 in taxable income
20,000 @ 5%= $ 1,000
15,000 @20% = 3,000
65,200 35,000=30,200 @ 35% 10,570
4,000 + 10,570 = 14,570 in taxes
75,000/14,570= 19.4 % rate of tax based on earned income
no let's look at cash out
14,570 in tax payments
5,000 in interest payment
3,000 in real estate tax payments
total cash out $22,570
percentage of earned income kept in cash 75,000/22,570=70%. only 70% of the income this worker earns is kept for himself.
ThomWV (1000+ posts) Sat Jul0211 09:03 AM
Response to Reply #1
4. True that, but what is more important is that it means taxes do not inhibit hiring
Once you understand then notion of marginal tax rates it follows that you will begin to understand why taxes do not inhibit hiring. Hiring is a function of demand. If products can be made at a profit before taxes they will still earn a profit after taxes (unless the tax rate is equal to or greater than 100%), only a slightly lower profit.
first $50,000 @ 40%
next $50,000 @ 60%
over 100,000 @ 80%
and wages are taxed as above.
so taxpayer 3 (the 75,000 earner) decides to start a business and leaves his job. note for this example lets say earner 3 works 50 hours a week for 50 weeks or 2,500 hours a year at his job
the first year the business has gross sales of $2,000,000 and total costs of $1,700,000 (not including a salary he pays to himself) or a gross profit of $300,000 ( lets say this taxpayer is now working 80 hours a week for 52 weeks or a total of 4,160 hours per year at this business
he pays himself $75,000 in salary
so the net profit is $2,000,000 $1,700,000 $75,000= $225,000
50,000 @ 40%= 20,000
50,000 @ 60% = 30,000
125,000 @ 80% 100,000
$150,000 in taxes on his profit of 225,000 or a tax rate based on profits of $225,000/$150,000 66%
plus he pays the same tax above on his $75,000 in salary. lets use the $ 15,620
so on income of $225,000 + $ 75,000 = $300,000 he pays $150,000 +$15,620 or $165, 620 in taxes, this equals 55% ($165,620/$300,000=55%)
So he already pays 55% of his total income in taxes. now keep in mind that all additional profits are going to be taxed at 80 %
so if he increases his salary from $75,000 to $100,000 he would be paying $25,000 * 35% or $8,750 more in taxes.
so now on a $100,000 salary he would pay $15,620 + $ 8,750 or $24,370 in total taxes
or $24,370/$100,000 or 24.4 percent of his income to taxes.
example
lets say the 75,000 earner is paid hourly there are 2.080 hours during a normal work year ( 52 weeks times 40 hours) so the 75,000 earner makes $36.05 per hour. $75,000/2080 hours
the $10,000 earner makes ($10,000/2,080) makes $4.80 per hour
and the $35,000 earner makes $16.82 per hour
let's say each worked 50 hours overtime and gets paid time and 1/2
$75,000 earner $36.05 times 1.50 = an overtime rate of $54.08
$10,000 eaner $4.80 times 1.50 = an overtime rate of 7.20
$35,000 earner 16.82 times 1.50= an overtime rate of $25.23
so 50 hours of overtime would increase income as follows:
75,000 earner = 50 hours times 54.08 = $2,704
$10,000 earner =50 hours times $7.20 = $ 360
$35,000 earner = 50 hours times $25.23 = $1,261
the 75,000 earner pays 35 % on the additonal income so he pays $2,704 * 35%= $946.00
so his additonal work has gained him a total of $2,704946=$1,758
a real hourly rate of $1,758/50 hours = $35.16 ( note this is actually less then his regular hourly rate)
75,000 earner has zero incentive to work the additional 50 hours of overtime.
the $10,000 eaner pays 5% ($18) of the $360 in taxes and as benefited himself by 36018=$342
an effective hourly rate of $342/50=$6.84 per hour. remember his regular hourly rate is $4.80 so by working 50 additional hours of overtime he has benefited himself while the 75,000 taxpayer did not even earn his regular hourly rate.
the $35,000 tax payer is also going to pay 35% of any additonal eanrings in taxes because in this example he is right at the top of the 20% bracket.
so the $35,000 taxpayer earns an additional $1,261 and pays $1,261 times 35 % or $441 in taxes
he has benefited himself $1,261 $441 or $820 by working the additional 50 hours of overtime.
his effective hourly rate is $820/50=$16.40
Again this taxpayer had not even earned his regular hourly rate by working the 50 hours of overtime. what incentive does he have to work the overtime?



 Join Date
 Jun 2008
 Location
 NC
 Posts
 248
07042011, 08:52 PMI realize that this posting is too complicated and i am sorry for that. I was trying to make a point and make it unquestionably correct and valids.
The essence of what i said in the posting is summarized below:
1) there is a huge difference in the actual percentage of taxes when expressed as a percentage of income between the lower tax brackets and the higher tax bracket. people in the lowest tax bracket pay .015 ( less then one percent of there income in taxes) whereas people in the higher brackets pay a substantially higher percent of thier income in taxes.
2) people in higher tax brackets have little or no incentive to work harder or increase profits because of high marginal tax rates

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