Marginal tax rate. That's an extremely important distinction.
A lot of people think moving up in to a higher tax bracket means their entire income is taxed at that rate, but it's entirely untrue. The top US tax bracket for 2015 starts at $413,201, but if you make $413,202 only the last $1 is taxed at that top rate.
Well, then, "God damn, 90% marginal tax rate!" For ultra-high income people, say making ten times the income where 90% rate kicks in (or around $10M in 2013 dollars annually in this historical data) the marginal tax rate can end up very close to their overall tax rate. Remember also, that historically the rates for capital gains and dividends were identical to those of ordinary income. All this is what people need to reference when they talk, e.g., about the rich having manipulated a redistribution of wealth over past decades.
The sad thing is tiny percentage of current populace (including the rich) have no idea that current income taxes are extraordinarily low historically. Formerly it was generally understood that progressive taxation was a good thing and made sense. America's "glory days" somehow happened with tax rates that conservatives now call "socialist".
Taxes discourage work. In the 70's it was common for just one member of a family to work, because if another person worked, all their dollars would be taxed at the 50-70% rate. The cost of working in terms of taxes, owning a car, gas, etc., got to the point where if a second person worked, the household would actually lose money, which of course leads to economic stagnation and recessions.
I agree progressive taxes make sense. The argument that a flat tax is fair by virtue of already being proportional fails to take into account the relative value of a dollar to the owner of that dollar.
In the 70's it was common for just one member of a family to work, because if another person worked, all their dollars would be taxed at the 50-70% rate.
Even as late as the 70s, it was common for just one member of a family to work because that person was the husband/father, and the wife/mother was strongly expected (and, through the way the employment system worked, often more or less forced to) stick to housework and childrearing.
> For ultra-high income people, say making ten times the income where 90% rate kicks in (or around $10M in 2013 dollars annually in this historical data) the marginal tax rate can end up very close to their overall tax rate.
Sure, but I'd happily take 10% of a billion versus taking home 90% of $40k without shedding too many tears.
Marginal tax rates mean a vanishingly small proportion of the population gets hit by increases to the top brackets, but Americans have been conditioned to see themselves as "temporarily embarrassed millionaires".
"Sure, but I'd happily take 10% of a billion versus taking home 90% of $40k without shedding too many tears."
What does this have to do with anything? Yes, there's a difference between marginal rates and overall rates. If people don't understand that as background context then they shouldn't even be in this discussion.
The main question to ask is, "How much tax is now being forgone by the trend to lower marginal rates over recent decades?" I don't know the number but it is at least many, many billions annually. Also, there were formerly lots of different tax brackets for the ultra-rich, with only the ultra-ultra-rich reaching highest marginal rate.
The question is not whether marginal rates are different from overall rates (which is a given). The question is how much could be gained by creating more brackets at the very top and raising marginal rates on all these top brackets up a bit (though by no means to where they've historically been), because it would make no real difference to the way America's ultra-rich live their lives. In other words, how much could be raised by making our income tax truly progressive again.
Exactly. I've had to explain to many people over and over our tax bracket structure. They keep thinking their entire money is taxed at a specific rate when you earn that much.
A lot of people think moving up in to a higher tax bracket means their entire income is taxed at that rate, but it's entirely untrue. The top US tax bracket for 2015 starts at $413,201, but if you make $413,202 only the last $1 is taxed at that top rate.