Mar 18 / David

Effective Tax Rate

Recently an Internet Dumbass was going on about the “high” taxes in the US. The context was national taxes and he said something about paying “nearly 40%” in taxes already. Granted, he was probably talking about all his taxes combined, but it did get me to wondering how the effective tax rate grows with income after you enter the Final Bracket.

Bracket Single Married Filing Jointly
10% $0 – $8,375 $0 – $16,750
15% $8,375 – $34,000 $16,750 – $68,000
25% $34,000 – $82,400 $68,000 – $137,300
28% $82,400 – $171,850 $137,300 – $209,250
33% $171,850 – $373,650 $209,250 – $373,650
35% $373,650+ $373,650+

(source: http://www.bargaineering.com/articles/federal-income-irs-tax-brackets.html)

So let’s say I make $N/yr in taxable income, where N > 373650 and I’m filing singly. The amount of tax I pay is going to be 10% of $8375 (the first bracket) plus 15% of ($34000-$8375) (second bracket) plus 25% of ($82400-$34000) (third bracket), etc. If I’m making $373650 exactly, I’m paying $108421.25 in taxes for an effective rate of 29%. Each additional dollar is going to be taxed at 35%.

The total effective rate R on my taxable income N will be

R = \frac{108421.25 + .35(N-373650)}{N} = \frac{108421.25}{N} + \frac{.35N}{N} - \frac{.35 * 373650}{N} = .35 - \frac{22356.25}{N}

So for instance, how much would I have to make for me to even be paying 33% (let alone 40%) of my income in federal taxes? $1,117,812.50. How about to be paying 34%? $2,235,625.00. It is impossible to reach 35% exactly, but how about 34.999? $2,235,625,000.00.

Could a (m|b)illionaire with an effective federal rate of a skosh under 35% be paying 40% total in income taxes? I’m not sure how to figure that out without a lot of data I don’t have. For the simple case of a flat rate it seems clear that you could have a total rate of just over 40% in some states. However there are many states that have no income tax at all, so it’s also clear you could get by with a max of 35%.

When poor people say they have a problem with harassment at work or crime levels or pollution, the rich solution is always “so find another job/place to live”. Rich people in high income tax states could always move to another state and lower their effective tax rate to well under 40%. Or, since the original complaint was about the high taxes in the US, another suitable country. I await the name of “other suitable country” with a tax rate less than the US.

One Comment

  1. dave stanford / Mar 22 2010

    I hear that somalia and afghanistan are currently libertarian utopia’s.

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