I was surprised to read this week that putatively educated Americans (a Louisiana lawyer, a Colorado dentist, an ABC News reporter) don’t understand the concept of marginal tax rates. Because of this lack of comprehension, per ABC, the lawyer and dentist are vowing to keep their taxable income below $250,000 to avoid President Obama’s proposed tax increase:
“I’ve put thought into how to get under $250,000,” said [the ill-informed dentist]. “It would mean working fewer days which means having fewer employees, seeing fewer patients and taking time off.”
This does not mean that if you bring in more than $372,951, every single dollar in your entire pile of money is taxed at 35%. Only Dollar #372,952 (plus whatever additional money you may earn) is taxed at that rate. Dollar #372,950 is taxed at 33%. Meanwhile, Dollar #1 is taxed at 10%. Hence the term “marginal”: In a progressive tax system, there are margins (i.e., boundary lines) at which the government increases the tax rate on any additional incoming dollar.
So I concluded a little infoviz might help clear up the misunderstanding. (Click on images to enlarge.)
At this year’s income tax rates, here are the raw numbers for people in each of the four filing statuses: