There is – the income bracket isn’t what all your money is taxed at. It’s a graduated scale. I’m going to make up numbers here just for an example.
I make $125,000. The first $5000 has no tax on it. The next $20000 are taxed at 5%. The next $25,000 are 10%. The next $30,000 is taxed at 15%. The next $30000 is taxed at 20%. And the last $15,000 are taxed at 35%.
So my total tax is 20000(0.05) + 25000(0.1) + 30000(0.15) + 30000(0.2) + 15000(0.35) = $19,250. My effective tax is 15.4%, even though I’m taxed higher than that on $45000 of my $125000.
It’s a piecewise function basically. And it works really well here because you start getting into very discretionary spending when it gets high, you’re not buying the essentials. You could have a bracket that has 75% tax on everything above a million for instance, and poorer people would be completely unaffected. This is why the myth of “if I get a raise I’ll be in a higher bracket and pay more in taxes” is incorrect.
Yeah so everyone is saying that the issue is that this system stops at the last bracket at 35%. If there was some continuous way to calculate the percentage, this pattern would be able to keep going.
When you say continuous, do you mean the tax rates? I assume so, because those are discrete numbers. You’re basically saying then what whatever the last bracket is, it needs to scale from 35% (in this example) to 100% at a certain income?
I don’t dislike the idea necessarily, but I think the problem with the wealthy not paying enough in taxes isn’t the highest rate, but what is taxed and how. Selling stock for instance is taxed at a lower rate than income, so we’d need to add a stipulation that if you make more than X, it’s taxed as if it’s normal income. (You’d have to make some exceptions for retiring people but that’s easy enough)
The Inflation Reduction Act had an idea that I think is worth pursuing, or at least calculating how it would go for the rich. Companies making a certain amount of profit in a tax year have to pay some % (maybe 20?) if that’ll be higher than their taxes calculated normally. It stops the loophole that lets corporations get away with paying no taxes. If we did that for rich people, I wonder how it would go. My gut instinct is that it would actually help a lot.
Edit: I just described Alternate Minimum Tax, which is a thing already. We’d just need to close loopholes around it by not letting anyone claim a deduction on it.
Probably not to 100% (because then the net income would go down) but yeah something like that. And yes you’re right, there are still many loopholes for rich people to avoid taxes so those issues should probably be fixed first. But to be fair I don’t know much about taxes or economics, it’s just an idea I had.
well then there should be a continuous way to make the percentage increase, like a sigmoid or so
There is – the income bracket isn’t what all your money is taxed at. It’s a graduated scale. I’m going to make up numbers here just for an example.
I make $125,000. The first $5000 has no tax on it. The next $20000 are taxed at 5%. The next $25,000 are 10%. The next $30,000 is taxed at 15%. The next $30000 is taxed at 20%. And the last $15,000 are taxed at 35%.
So my total tax is 20000(0.05) + 25000(0.1) + 30000(0.15) + 30000(0.2) + 15000(0.35) = $19,250. My effective tax is 15.4%, even though I’m taxed higher than that on $45000 of my $125000.
It’s a piecewise function basically. And it works really well here because you start getting into very discretionary spending when it gets high, you’re not buying the essentials. You could have a bracket that has 75% tax on everything above a million for instance, and poorer people would be completely unaffected. This is why the myth of “if I get a raise I’ll be in a higher bracket and pay more in taxes” is incorrect.
Yeah so everyone is saying that the issue is that this system stops at the last bracket at 35%. If there was some continuous way to calculate the percentage, this pattern would be able to keep going.
When you say continuous, do you mean the tax rates? I assume so, because those are discrete numbers. You’re basically saying then what whatever the last bracket is, it needs to scale from 35% (in this example) to 100% at a certain income?
I don’t dislike the idea necessarily, but I think the problem with the wealthy not paying enough in taxes isn’t the highest rate, but what is taxed and how. Selling stock for instance is taxed at a lower rate than income, so we’d need to add a stipulation that if you make more than X, it’s taxed as if it’s normal income. (You’d have to make some exceptions for retiring people but that’s easy enough)
The Inflation Reduction Act had an idea that I think is worth pursuing, or at least calculating how it would go for the rich. Companies making a certain amount of profit in a tax year have to pay some % (maybe 20?) if that’ll be higher than their taxes calculated normally. It stops the loophole that lets corporations get away with paying no taxes. If we did that for rich people, I wonder how it would go. My gut instinct is that it would actually help a lot.
Edit: I just described Alternate Minimum Tax, which is a thing already. We’d just need to close loopholes around it by not letting anyone claim a deduction on it.
Probably not to 100% (because then the net income would go down) but yeah something like that. And yes you’re right, there are still many loopholes for rich people to avoid taxes so those issues should probably be fixed first. But to be fair I don’t know much about taxes or economics, it’s just an idea I had.
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brackets aren’t continuous
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