The tax rate you should care about most

June 1, 2011

We talk a lot about tax rates here, and about whether they might go up in the future and for whom. But to think intelligently about tax policy — not to mention your own tax strategy — it pays to stop and ask: Which tax rate do you mean? And what tax rate matters most to you?

When most people talk about tax rates these days, what they’re really talking about are marginal tax rates. Your marginal tax rate is the percent you’ll pay on the last dollar of income you bring in. Today, those federal marginal tax rates range from 10 percent to 35 percent; under the terms of last year’s tax agreement, they’ll expire next year and the one thing you can count on is another big debate over what tax policy should look like.

But looking at marginal tax rates is only one way of looking at taxes. When I talk with friends about taxes (yes, I’m geeky enough to do this), I find that a lot of people are confused about what their marginal rate is and what percentage of their income they’re actually paying to the government. The latter number is a mix of tax rates applied to income that’s likely been reduced by various deductions, for home mortgage interest, say, or for charitable contributions.

No matter how much money you bring home, you get to take advantage of the 10 percent rate on your first $17,000 of taxable income if you’re married (or the first $8,500 of taxable income if you’re single). Then, as marginal rates pile one atop another, as your income rises, a slice of it gets taxed at the next highest rate, and so on, and so on, on up to the 35 percent tax bracket if you make more than $379,150.

The actual rates that people pay as a percent of their income are substantially lower than those marginal tax rates because of the combination of rate layering and deductions. The effective federal tax rate, including Social Security taxes and other individual taxes, for all households was 20.4 percent  in 2007 (the most recent year for which data is available), according to data from the Tax Policy Center. That’s below the 21.6 percent rate that applied two decades ago. And, today, middle-income taxpayers (that is, the middle quintile) paid 14.3 percent, while the wealthiest taxpayers (that is, the top 10 percent) paid 26.7 percent. Those numbers, too, are below what they were in 1987.

An even broader way to look at tax rates is to simply divide total federal revenues by the gross domestic product. Bruce Bartlett, a top  policy adviser under both Presidents Ronald Reagan and George H.W. Bush called the Republican party to task for arguing that tax rates are high in a piece in Tuesday’s New York Times:

By this measure, federal taxes are at their lowest level in more than 60 years. The Congressional Budget Office estimated that federal taxes would consume just 14.8 percent of G.D.P. this year. The last year in which revenues were lower was 1950, according to the Office of Management and Budget … The truth of the matter is that federal taxes in the United States are very low. There is no reason to believe that reducing them further will do anything to raise growth or reduce unemployment.

Before the tax policy debates truly heat up, I’m curious how you think about your own tax rate, and if you think there’s a right way to look at these rates. Personally, I prefer to think of my tax rate as the percent of my overall income that goes to taxes, rather than the marginal rate that applies to the last dollar I earn: My goal in tax planning is to lower my overall tax burden, not to fuss about where the magic cutoff is between two marginal rates.

What about you? Do you care more about the marginal rate that you’ll pay on the last dollar that you earn? Or more about the overall percentage of your income that you pay in taxes each year?


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I believe the wealthiest Americans should pay a larger share of taxes for the privilege of being able to accumulate wealth without any fear of outside influence. The reason for this is the working class and the military. Without the working class and military the upper class would cease to exist. They really need to start acknowledging this and increase wages. wages have been stagnant far too long.

Posted by rodtile | Report as abusive

The rate I’m most focussed on is that influenced by AMT. And damn, the AMT only sticks to those whose income below a couple million. People like Warren Buffet and Rupert Murdoch have mostly avoided the minimum tax penalty payment. The Dems may have created it, but the GOP socialist movement has been sticking it to the masses for years.

Posted by SanPa | Report as abusive

Perhaps it’s time to overhaul the whole mess and do away with taxes on income. There would be fewer economic distortios as people would spend their income and invest their income in ways that had purely economic reasons rather than some tax avoidance reasons. 40% of us pay no income tax, most of the actual taxes collected fall on a small percentage of the higher earners, and somehow this is fair? What is standing in the way of doing this? Congress uses this system to garner political favors and get their sorry selves re-elected at the taxpayers expense!

Posted by zotdoc | Report as abusive

I care more about the marginal rate than the overall percentage because the marginal rate specifically targets success. People will choose to earn just under the higher marginal rate because they feel it is unfair to be forced to pay a higher rate whereas others benefit. Slavery was abolished but discrimination based on fiscal responsibility is alive and well. Therefore, although people can be forced to pay more, the Gov can’t force them to earn more. Who is John Gault?

Posted by iowafarm | Report as abusive

That you have to excuse yourself by confessing to being geeky to talk about taxes, or that anyone who pays attention to what their elected representatives are really doing needs to “get a life”, explains the entire reason the Wonderful Magical Merry-go-round is about to come to a full stop.

Posted by threeRivers | Report as abusive