Marginal tax rates: the super easy explainer America needs

Jason Linkins

Jason Linkins Senior Editor, ThinkProgress

There are only three sure things in life. The first is death. The second is taxes. And the third is that in any discussion of the second, someone will inevitably be confused by the matter of marginal tax rates. While we will spend our entire lives railing against all three of life’s certainties, it is only this last one that we have any hope at ameliorating.

Marginal tax rates and how they function in our lives became a renewed topic of conversation in recent days thanks to a 60 Minutes segment from this past weekend featuring newly elected Rep. Alexandria Ocasio-Cortez (D-NY), whose star has shone brightly since her arrival in Washington thanks to the artful way she’s used her social media presence to make the practice of politics seem more accessible to ordinary people.

In that spirit, let’s undertake an explanation of how marginal tax rates work, because it’s long been an area where opportunistic deceivers have thrived at the expense of honest people.

During her 60 Minutes interview, attention turned to one of Ocasio-Cortez’s policy priorities: the passage of what’s become colloquially known as the “Green New Deal,” which proposes that the United States pursue a path away from fossil fuels and toward green energy, while making sure that workers currently in the industry are treated fairly during this transition. Due to the fact that Ocasio-Cortez supports an ambitious, progressive-minded economic policy and not a gargantuan build-up of the Pentagon budget for no discernible reason, her 60 Minutes interlocutor, Anderson Cooper, asked her how she would pay for it.

In a game attempt to provide an answer, Ocasio-Cortez essentially offered this plan: use our progressive system of taxation to soak the rich.

“Once you get to the tippy-tops, on your $10 millionth dollar, sometimes you see tax rates as high as 60 percent or 70 percent,” she explained. “That doesn’t mean all $10 million dollars are taxed at an extremely high rate. But it means that as you climb up this ladder, you should be contributing more.”

Of course, this is just one way that the Green New Deal could be funded. One could also pay for the program through a series of carbon taxes, or a financial transaction tax, or some combination platter of taxes and fees. Alternatively, Democrats could opt to go the route often taken by Republicans, and not address the pay-for matter at all.

Regardless, in the wake of Ocasio-Cortez proposing a 70 percent tax rate on top earners, her critics emerged from the woodwork, responding with a take that, while plausible-sounding, was actually illiterate.

“Republicans: Let Americans keep more of their own hard-earned money. Democrats: Take away 70% of your income and give it to leftist fantasy programs,” Louisiana Rep. Steve Scalise (R) tweeted over the weekend.

Americans for Tax Reform founder Grover Norquist piled on Saturday night. “Slavery is when your owner takes 100% of your production,” he tweeted. “Democrat congresswoman Ocasio-Cortez wants 70% (according to CNN)

What is the word for 70% expropriation?”

Obviously, those things that Ocasio-Cortez actually proposes are fair game for debate, but one thing she has definitely never proposed is “taking away 70%” of anyone’s income or “70% expropriation.” In this case, Scalise and Norquist either do not understand how marginal tax rates work, or they are actively exploiting the public’s ignorance of the matter in order to deceive them. It’s hard to not infer the latter.

Knowledge of marginal tax rates should be a part of everyone’s basic civics education, but as it’s not, there’s no sense in shaming ordinary people for not knowing. Nevertheless, elected representatives and tax policy advocates are definitely two types of people who should absolutely know how marginal tax rates work.

No one tells you this (about tax brackets)

In order to get a handle on how marginal tax rates work, the first thing you need to understand is the concept of tax brackets. Here, via Forbes, are the current tax brackets for individual filers in 2019 (there are also three tax brackets for capital gains taxes):

There are currently seven brackets, defined by the amount of taxable income that an individual filer makes in a given tax year. What this chart shows is the rate of taxation that is applied to dollars within each of these brackets. For example, in the case of single filers, a 10 percent rate is applied to the first taxable dollar earned through the $9,700th taxable dollar. As soon as this tax filer pushes into the second bracket with their $9,701st taxable dollar, a 12 percent rate is applied to all income within that bracket.

The top bracket in 2019 applies a 37 percent tax rate to top earners, which range from married filers filing separately who earn at least $306,176 in taxable income to married filers filing jointly who earn $612,351 in taxable income. So, one of the things that would have to come to pass for Ocasio-Cortez to fund the Green New Deal in the manner she describes is that one or more additional tax brackets would have to be created, in order to facilitate applying a 70 percent tax rate on people earning more than a $10 millionth dollar of taxable income.

There are three things, then, that are important to know about this:

  1. What Ocasio-Cortez is proposing to do would only impact a small number of tax filers — those who earn at least $10,000,000 in taxable income. It’s fair to argue that this is a bad idea but it’s not correct to suggest she’s proposing some sort of blanket expropriation on “Americans,” generally speaking, as Scalise implies in his tweet.
  2. If you’re so fortunate to be making at least $10,000,000 in taxable income you’re also likely to be familiar with the bevy of tax breaks and loopholes available to you (or have access to tax professionals who do) that will end up limiting the amount of tax you’ll pay to far less than the proposed 70 percent rate.
  3. Most critically, that 70 percent rate of taxation doesn’t affect any dollar of taxable income but the $10 millionth and above.

Ocasio-Cortez isn’t the one trying to fleece you

The reason this third point is so critical is that one very common misconception about tax brackets is the idea that once a filer pushes into a higher bracket, that higher tax rate gets applied to all of that filer’s earnings, as opposed to just those dollars within that bracket. And so those who promulgate deceptions at the fringes of marginal tax rates often end up convincing people to do things that go against their financial interests, like turn down hard-earned raises in pay.

Back in 2011, USA Weekend (a sort of Parade-like weekend newsmagazine that used to be available to USA Today subscribers) published a since-deleted review of Laura Laing’s book, “Math For Grownups.” In the course of that review, its author, Gregory Connolly, made this terrible mistake:

That raise actually might not be as good as it looks. The extra money is nice, but it could very well bump you into the next tax bracket, possibly leaving you with less money than you had before the raise. Better benefits, such as medical, can save you money while keeping you in the same tax bracket.

This led Dean Baker of the Center for Economic and Policy Research to intercede with an important correction:

No, no and 286,000 times no! The tax system brackets give marginal rates. This means that if the raise bumps you into a higher bracket then you pay more taxes only on the income in the higher bracket. Suppose that the tax bracket for income under $200k is 25 percent, and for income over $200k is 33 percent. If you get a raise that pushes your income from $195,000 to $205,000 then you only pay the higher 33 percent tax rate on the $5,000 that is above the $200k threshold not your whole income. Therefore, there is no (as in none, nada, not any) way that getting more money, and being pushed into a higher tax bracket will leave you with less money after taxes.

Promoting the idea that Ocasio-Cortez’s tax proposal amounts to the wholesale seizure of everyone’s incomes may be the quickest and most effective way of scoring political points against her policy ideas, but it’s also downright predatory. Sowing these misconceptions can convince ordinary strivers to turn down life-changing raises in pay, or business owners to hold back on expanding their footprint or making new hires. It can lead some journalists to unwittingly spread misinformation, and force others to have to perennially contend with these errors.

In the end, there are going to be those who will not support Alexandria Ocasio-Cortez’s proposed Green New Deal. There will be others who will bitterly oppose the idea that this proposal be financed on the backs of the rich. But if there’s one thing that deserves to be remembered about this episode, it’s that Ocasio-Cortez made an honest attempt to level with the public about how she might finance the policy proposal. Her detractors, on the other hand, did not — and by spreading misinformation about marginal tax rates, they demonstrated that they had an added layer of contempt for the public in the process.


Reposted from Think Progress