How much do you really pay in taxes?
Last night’s vice presidential debate was a good, lively, back-and-forth between Vice President Joe Biden and Rep. Paul Ryan (Wis.). The statement I singled out below was one that I found troubling (among a few)—and one that does a huge disservice in informing American voters on what changes in tax policy essentially mean. About halfway through the debate, Ryan said:
“Now, we think that government taking 28 percent of a family and business’s income is enough. President Obama thinks that the government ought to be able to take as much as 44.8 percent of a small business’s income.”
Far too often when discussing tax policy you will hear lawmakers and pundits use phrases such as the one above—government is “taking X percent of a family’s or a business’s income.” This, whether purposeful or not, unfortunately promotes misinformation regarding how tax rates work. A voter might hear something like what Ryan said and think, “I make $200,000, which puts me in the 33 percent bracket, which means government is literally going to take $66,000, or around a third of my total income, in taxes ($66,000 is 33 percent of $200,000).” This is wrong on a number of levels, and politicians rarely take the time to correct this misperception. For some, not correcting this serves an ideological goal—if people think they are taxed too high, they are more likely to support lawmakers who vote for tax cuts.
The reality is, the total earnings of an individual, a family, or a business is very different from their adjusted gross income—which is the level that is taxable after one takes allowance for personal exemptions and itemized deductions. Furthermore, the share of one’s income that one actually pays in taxes—the average tax rate—is generally much lower than the marginal tax rate, which is the rate imposed on the last dollar of one’s taxable income. Top marginal rates are what Ryan quoted last night, a quote which was designed to make people believe the Obama administration literally wanted to net 44.8 percent of one’s income. (There are other issues with that specific number but I’ll stick to one point in this post).
Information on tax parameters and brackets is widely available; here is a good summary page from the Tax Policy Center. It shows that income between certain parameters is taxed at certain levels that range between 10 percent and 35 percent (currently). For single, married filing jointly, and head of household tax filers, only taxable income more than $388,350 is taxed at a 35 percent rate. That means your 388,349th dollar is taxed at 33 percent, and income below that is taxed at even lower rates. If Obama’s policy were passed, and by that I mean if the 33 and 35 percent top rates reverted to 36 and 39.6 percent respectively, how much more would a joint-filing family with adjusted gross income of $250,000 owe in taxes? Zero.
It is this structure that makes our income tax code progressive. Blurring the reality by perpetuating the misperception that the highest marginal rates apply to 100 percent of one’s earnings is damaging, and politicians and pundits should be challenged for doing so.