How Tax Brackets Work — $250,001 Will Pay Five Cents More Tax

This post originally appeared at Campaign for America’s Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.
This discussion of whether to get rid of the Bush tax cuts for the rich has been a learning experience. I have been listening on the radio and reading the comments at blogs. The main thing I am concluding is that people just do not understand how tax brackets work.
When people talk about raising taxes on people “who make more than” a certain income they really mean that they are going to raise it ONLY on the income that comes in after a certain income is received, not on the person’t entire income.
Here is what I mean. Suppose they say they are going to raise taxes on incomes above $250K. People seem to think that this means if you earn $250K plus a dollar, that you owe an additional tax on the entire $250K. This is not correct. I actually hear stories about people who give away money, and do other things to avoid going “into a higher bracket” because they think they have to pay additional taxes on their entire earnings.
Here is how it really works. What happens is that the first $250K is taxed just like it has been, but anything that is made over $250K — and only the amount over $250K — is then taxed at the higher rate. The tax on the amount below $250K is not changed.
Example: Suppose the tax increase is 5% on income over $250K. This means that a person who reports income of $250K plus one dollar will be taxed an additional 5 cents. FIVE CENTS!
Yes, that’s right, if it is 5% they are talking about then it means a 5 cent tax increase on people who make $250,001.
Let me repeat that. If you make $250,001, and they raise taxes 5% on people who make over $250K, then you will have to pay 5 cents more. Five cents. F.I.V.E. C.E.N.T.S. That is what people are so upset about. 5 cents.
If it is 5% a person making $260K might pay an additional $500. That’s right, the proposed tax increase is approx. $42 a month on people making $260K, about $21,600 a month. Forty-four dollars out of twenty-one thousand. THIS is what all the right-wingers are screaming about. THIS is what all the Ayn Rand cultists are threatening to stop working over. THAT is how tax brackets work.

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2 thoughts on “How Tax Brackets Work — $250,001 Will Pay Five Cents More Tax

  1. Have you ever heard of ” Nickel and Dime you to Death” What about the millions who don’t even pay that 5 cents for the privilege of living off this land and in this country. They only have there hand out looking for that 5 cents

  2. First of all, this explanation is very cleverly worded to mislead–just as most liberal discussion is.
    First of all, people earning $250,001 have *already* been taxed $87,500 and $0.35 on that extra dollar. So, an additional hike of 5% means the government still takes 35% of that dollar, plus the extra 5%. ***So, $0.40 of every dollar over the bracket amount goes to the government.*** That’s pretty much 50% of your income when you take into account state and local taxes–FIFTY PERCENT OF YOUR INCOME. So, regardless of which dollar is taxed at which amount, $0.05 more than what is already too much is indeed a little upsetting. Simply saying “5 cents” is misleading.

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