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  • There are a few topics that are considered off-limits at my family's Thanksgiving table,

  • and one of them is TAXES, or more specifically, the American tax SYSTEM.

  • Virtually everyone has a strong opinion about it: It's unfair!

  • It doesn't go far enough!

  • It's too complicated!

  • Cable news and social media are filled with passionate debates about it, but how many

  • people actually know how our current tax system works?

  • If your eyes glaze over when you hear phrases likeprogressive taxationandmarginal

  • brackets,” you're not alone.

  • Even some of our law-makers seem to have a shaky grip on the concept.

  • But if you hope to have a say in a system that impacts your wallet every day, you should

  • understand howand whyit ended up this way.

  • Let's start with something all of us can agree on.

  • The U.S. tax code is complicated.

  • Really complicated.

  • It's one of the most complicated systems in the world, taking the average citizen 13

  • hours to file each year.

  • Compare that to, say, Japan, where it's closer to 15 minutes.

  • And one reason we have such a confusing system is because our income is taxed at different

  • rates, depending on how much we earn.

  • For nearly 100 years, our country had no income tax.

  • The first one was levied in 1861 during the civil war at a flat 3% tax on income over

  • $800.The next year, in 1862, the firstprogressive tax bracketappeared, with the 3% rate

  • AND a 5% rate for any income earned over $10,000.

  • Then in 1872, the income tax was repealed becauseget thisthe government no

  • longer needed the money.

  • Can you even imagine…?

  • Then in 1913 with the 16th Amendment, progressive taxes made a permanent come-back.

  • It gave the Federal government the free reign to tax workers' income in every state.

  • So what is a “progressive tax”?

  • Well, you can think of tax systems coming in one of three main flavors.

  • Regressive, Proportional, or Progressive.

  • A regressive tax impacts lower paid workers more severely.

  • Paying sales tax on groceries or clothing will end up being a higher portion of a low-earner's

  • pay check than a high-earner.

  • A worker earning $20,000 a year who pays $1,000 in sales tax will be parting with 5% of his income.

  • Another making $100,000 paying that same tax for the same goods will only be charged 1%

  • of her income for the same thing.

  • A simpler solution would be a proportional tax, where, simply put, everybody pays the

  • same percentage of their income, no matter how much they make.

  • Nine states currently impose a proportional,

  • flat state income tax.

  • That means no matter how much you make, your tax rate stays the same.

  • For example, 5% of every dollar earned.

  • Finally there's the progressive tax, a system that has a heavier impact on high earners.

  • Low earners may end up paying little or nothing, with only the wealthiest people paying the

  • highest tax rates.

  • How does this actually work?

  • Through a series of different tax levels ormarginal tax brackets”.

  • Buckle up, it's about to get exciting!

  • Let's say you're a single person making $60,000/yr.

  • A quick look at the IRS Tax Brackets will tell you that you fall into the 22% bracket.

  • Do you have to give the government 22% of your income?

  • No!

  • A common misconception is that entering a higher tax bracket means your whole income

  • is taxed at the higher rate.

  • So how much are you actually paying?

  • After taking your available deductions, you're left with $47,800 inTaxable income”.

  • As of 2019 we have 7 marginal tax brackets between 10 and 37%.

  • Each bracket along the way applies to one specific chunk of your income, not the whole thing.

  • Bracket 1 is for your first $9,525, and it gets taxed at 10%.

  • Next stop is Bracket 2.

  • This applies to $29,175, and is taxed at a rate of 12%.

  • Last stop is Bracket 3, where your remaining income of $9,100 will be taxed at 22%.

  • Even though you're in the 22% tax bracket, youreffective tax rateis only 10%,

  • thanks to the marginal rates in our progressive tax system.

  • So a single-filer with a taxable income of $500,001 may be in the highest tax-bracket

  • of 37%, but only $1.00 is taxed at that rate.

  • The effective rate will be much lower.

  • This system is definitely more complicated than a flat-tax.

  • But is it fair?

  • Simply put; no.

  • A progressive tax system, by definition is unfair.

  • It allows lower earners to pay very little tax

  • In fact more than 44% of Americans pay no federal income taxes.

  • And the more money you make, the less of it you will keep.

  • Opponents of progressive taxation tend to be higher earners, arguing that the system

  • punisheswealthy people, and actively discourages making a higher income.

  • They claim that a flat-tax would be simpler, easier, and more fair.

  • Supporters of a progressive tax, however, point to the real-world human impact on struggling

  • families and low wage earners.

  • They argue that if people have a greater ability to pay, then they should pay more.

  • And a progressive tax system, they claim, can counteract the regressive nature of sales

  • taxes, easing the impact of taxes on your rent or groceries, while hitting you harder

  • in your ability to take vacations or buy luxury goods.

  • And while nobody loves paying taxes, the average US tax-payer actually pays less than almost

  • any other developed nation.

  • Compared to, say Belgium, we get off pretty easy.

  • Their lowest tax-bracket is 25%, and the highest is 50% for anything over 38,080 Euros!

  • Do you feel our progressive tax-system encourages laziness?

  • Does it discourage people from earning more money?

  • Or is it giving a leg-up to people with lower salaries?

  • Whatever your opinion, now that you understand the mechanics of marginal brackets and progressive

  • taxation, you'll be in a much better place to argue about it over your next Thanksgiving dinner.

  • Or in the comments section.

  • And that's our two cents!

  • Thanks to our patrons for keeping Two Cents financially healthy.

  • Click the link the description if you'd like to support us on Patreon.

  • I'm sure you have an opinion about our current tax system, go ahead and put it in the comments,

  • or you could share it with your elected representative!

There are a few topics that are considered off-limits at my family's Thanksgiving table,

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B1 US tax income progressive bracket taxed marginal

How Do Tax Brackets Actually Work?

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