The Difference Between Marginal and Effective Tax Rates

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Sunday, Rep. Alexandria Ocasio-Cortez (D-NY) was interviewed for 60 Minutes. When her views on our tax code and federal spending were brought up, she suggested we return to a 70% top marginal income tax rate. So-called fiscal conservatives, including supporters of 2017’s $2 trillion tax bill, immediately went on the defensive and put their foot in their mouths.

Being disingenuous on Twitter might get conservative pundits a few outrage retweets, but it’s bad for policymakers like Rep. Steve Scalise to engage in. Still, after their passage of the Tax Cuts and Jobs Act that will balloon the deficit and hurt workers, there is the prospect that Republican members of Congress don’t actually know what they’re talking about when it comes to taxes, including what marginal tax rates are. In that case, here’s a short explanation:

Marginal tax rates are the tax rates set on income above a certain bracket. It is considered a progressive tax because the different thresholds deal with income differently, taxing higher amounts more and lower amounts less.

For example, the current tax rate for a single person’s income under $9,525 is 10%. That means all income under $9,525 is taxed 10%. If a single person made $10,000, only the income above $9,526 would be subject to the 12% tax rate, meaning $475 would be taxed 12%.

Let’s say Bob, a single taxpayer, has a taxable income of $40,000 a year. Here’s how he would be taxed, solely based on the brackets and without accounting for itemized deductions.

As you can see, the highest bracket Bob’s income would fall into is 22%, but just over a grand would be taxed at this rate, making his effective tax rate much lower. Similarly, if multimillionaires with incomes over $10 million were taxed 70%, only the income over $10 million would be subject to this rate, whether it be $1 or $1 billion more. That’s why having more tax brackets, not less, would make our tax code even fairer, because greater amounts of wealth should be handled accordingly.

If Republicans disagree with this, that’s one thing. But to conflate marginal and effective tax rates rather than debate the issue at hand is not only wrong, but suggests they don’t have a leg to stand on when it comes to defending unchecked, monumental wealth inequality.


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