I had the opportunity to participate in an Americans for Democratic Action panel discussion yesterday on tax fairness. The panel, called “Tax Equity: Paying Fair,” was moderated by John Nichols of The Nation and included panelists Bob McIntyre of Citizens for Tax Justice, Mike Lapham of United for a Fair Economy, Dean Baker of the Center for Economic and Policy Research, Elspeth Gilmore of Resource Generation, and Chuck Marr of the Center on Budget and Policy Priorities. It was an honor to participate alongside them.

The panel covered a number of topics, including the Buffett Rule, the Paul Ryan budget, the George W. Bush-era tax cuts, the equalization of tax rates for capital and labor income, corporate tax dodging, and a financial transactions tax. But beyond the wonkier side of tax policy, Baker raised an important point that merits highlighting. He talked about people’s misperceptions regarding how much federal income tax they actually pay—in other words, confusion of marginal tax rates for (lower) effective rates. For example, the second highest tax bracket (33 percent) is assessed for single filers on taxable income between $174,400 and $379,150 (for the tax year 2011 returns due April 17). If you are a single filer with $180,000 in annual taxable income, you do not pay 33 percent on all of your income—as is widely  misperceived. You would pay 33 percent only on your total income (less the personal exemption, deductions, and exclusions) exceeding $174,400. In this case, only $5,600 of your total income would be subject to the 33 percent rate.

I was really glad to see Dean Baker bring up the point of marginal versus effective tax rate confusion, because I think widespread misperception unduly adds to public fears of returning to Clinton-era tax rates. Raising the top tax bracket from 35 percent to 39.6 percent will only very marginally impact what high earners pay. Most Americans simply do not make enough to be subject to top income tax rates; President Obama’s proposal to extend the Bush tax cuts for households with less than $200,000 ($250,000 for joint filers) in adjusted gross income—letting only the top two rates expire—would result in a tax increase for only 2.1 percent of households. I was hoping to make a similar point to Baker’s, had there been more time for that in our conversation. I was recently struck by a portrayal of tax rate perceptions and reality in Bruce Bartlett’s new book on tax reform, The Benefit and the Burden. Bartlett draws from a CBS News/New York Times poll from April 14, 2010, that asks the following:

On average, about what percentage of their household incomes would you guess most Americans pay in federal income taxes each year: less than 10 percent, between 10 and 20 percent, between 20 and 30 percent, between 30 and 40 percent, between 40 and 50 percent, or more than 50 percent, or don’t you know enough to say?

The results are depicted below. The respondents indicated they believed 5 percent of Americans pay less than 10 percent of their income in federal income taxes. The reality is 86.5 percent of Americans actually did, in 2010. Additionally, respondents indicated they believed 38 percent of Americans pay over 20 percent of their income in federal income taxes. The reality: Only 0.6 percent of Americans pay over 20 percent of their income in federal income taxes.

Source: The Benefit and the Burden, 2012