Marginal Tax Rates

Originally published January 3, 2011

I have been toying around with the idea of a free money allowance as a prebate for a unified flat income tax. The numbers are interesting, if a bit disheartening. I had hoped to push a 25% flat rate with possibly a higher rate for the really rich. (As long as Warren Buffet, George Soros, and Hollywood vote Democrat it is fair to say the really rich could use a bit more taxes.) Alas, it looks like a higher rate would be needed to break even for the well off.

Anyway, I think you will find the current tax rates to be instructive. I took five of the federal income taxes collected on working class. (I omitted unemployment insurance.) Then, I did a bit of algebra in order to to treat employer portions of FICA and Medicare as part of salary in order to be able to compare a single flat tax with the current array. For tax filers who simply take the standard deduction and personal exemptions, the following tax rates hold.

For single taxpayers:

Nominal Income	Total Income	Payroll Tax	Income Tax	Total Tax	Average Rate %	Marginal Rate %
14500	15609	2219	1209	3427	22	28.1
25000	26913	3825	2784	6609	24.6	28.1
30000	32295	4590	3534	8124	25.2	28.1
40000	43060	6120	5269	11389	26.4	37.4
50000	53825	7650	7769	15419	28.6	37.4
60000	64590	9180	10269	19449	30.1	37.4
75000	80738	11475	14019	25494	31.6	37.4
100000	107650	15300	20687	35987	33.4	40.2
200000	209522	19043	49912	68955	32.9	35.4
300000	310972	21943	82912	104856	33.7	35.4
500000	513872	27743	151366	179110	34.9	37.4
1000000	1021122	42243	326366	368609	36.1	37.4
2000000	2035622	71243	676366	747609	36.7	37.4
5000000	5079122	158243	1726366	1884610	37.1	37.4

For a couple without children:

Nominal Income	Total Income	Payroll Tax	Income Tax	Total Tax	Average Rate %	Marginal Rate %
14500	15609	2219	720	2939	18.8	23.5
25000	26913	3825	1818	5643	21	28.1
30000	32295	4590	2568	7158	22.2	28.1
40000	43060	6120	4068	10188	23.7	28.1
50000	53825	7650	5568	13218	24.6	28.1
60000	64590	9180	7068	16248	25.2	28.1
75000	80738	11475	9318	20793	25.8	28.1
100000	107650	15300	15538	30838	28.6	37.4
200000	215300	30600	42200	72800	33.8	40.2
300000	317593	35186	74372	109558	34.5	35.4
500000	520493	40986	142753	183739	35.3	37.4
1000000	1027743	55486	317753	373239	36.3	37.4
2000000	2042243	84486	667753	752239	36.8	37.4
5000000	5085743	171486	1717753	1889239	37.1	37.4

And for a family of four (with no child tax credits applied; I am not up to date on the latest law on this score):

Nominal Income	Total Income	Payroll Tax	Income Tax	Total Tax	Average Rate %	Marginal Rate %
14500	15609	2219	0	2219	14.2	14.2
25000	26913	3825	1040	4865	18.1	23.5
30000	32295	4590	1540	6130	19	23.5
40000	43060	6120	2973	9093	21.1	28.1
50000	53825	7650	4473	12123	22.5	28.1
60000	64590	9180	5973	15153	23.5	28.1
75000	80738	11475	8223	19698	24.4	28.1
100000	107650	15300	13713	29013	27	37.4
200000	215300	30600	40156	70756	32.9	40.2
300000	317593	35186	71963	107149	33.7	35.4
500000	520493	40986	140198	181184	34.8	37.4
1000000	1027743	55486	315198	370684	36.1	37.4
2000000	2042243	84486	665198	749684	36.7	37.4
5000000	5085743	171486	1715198	1886684	37.1	37.4

As we can see, the marginal rates get up to 28% rather quickly, and peak at a bit over 37%. Dick Armeyâ€™s call for a 17% flat tax is a huge giveaway to the rich compared to current law.

I crafted a flat 40% tax plan which merged all these taxes which comes out as a tax cut for everyone short of around $200K/year/individual by having a $12,000/year prebate. Not sure how this would come out for the treasury, but if we count the prebate against all welfare and Social Security benefits, we could get most people off those other programs.

Of course, those who game the system pay less than the rates above. For example, state income taxes alone take many high income earners above the standard deduction. Throw in mortgage interest and property taxes and my estimate for the professional class (doctors, lawyers, full professors, engineers, etc.) is low. Furthermore, pay in the form of health insurance is not taxed. (Or is that was? I am not up on the details of Obamacare.) And professional class workers can defer income through 401(k) plans, HSAs, etc.

So my evil plan may be a wash for professionals. But even if it is a wash monetarily, it eliminates the need to play the governmentâ€™s game to keep your cash. Those who want to save to start a business instead of save for retirement. We could expect a mini boom in entrepreneurship. Furthermore, employing others would much easier. One simple tax to collect. Multiply by 0.4 and send it in.

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Marginal Tax Rates