Editor’s note: This story has been updated to clarify that under the Obama administration’s proposed revisions to income tax rates, taxpayers in the highest tax bracket would not only pay a higher marginal tax rate on income above $398,350, but would also be affected by proposed adjustments to the lower brackets and other changes.
The Republicans in Congress and President Obama are in the process of fighting World War III over tax rates for upper-income taxpayers.
The president wants to raise rates on taxpayers earning more than $250,000 per year. The Republicans introduced a plan, later withdrawn, to increase rates only on those earning more than $1 million per year.
With all this going on, now is a good time to understand the term "marginal tax rate," because that is what all the fighting is about.
It sounds complicated, but it’s actually very simple: Your marginal tax rate is the tax you pay on your next dollar of income. For example, if your marginal tax rate is 28 percent and you earn $1,000 this week, you’ll owe $280 in federal income tax.
It’s important to understand that your marginal tax rate applies only to your next dollar of income, not all your income.
Thus, a person with a 28 percent marginal tax rate would not pay a 28 percent tax on all of his income. As shown in the table below, in 2012 a single taxpayer would pay a 10 percent tax on his first $8,7000 in income, a 15 percent tax up to $35,350, and a 25 percent tax up to $86,650. The 28 percent rate would apply only on taxable income over $85,650.
So a single taxpayer with a taxable income of $90,000 in 2012 would pay his 28 percent marginal tax rate on only a tiny sliver of his income: $4,350. This would amount to $130.50 in additional taxes (3 percent of $4,350).
|
Tax rate |
Taxable income if single | Taxable income if married, filing jointly |
|
10 percent
|
Up to $8,700
|
Up to $17,400
|
|
15 percent
|
$8,701 to $35,350
|
$17,401 to $70,700
|
|
25 percent
|
$35,301 to $85,650
|
$70,701 to $142,700
|
|
28 percent
|
$85,651 to $178,650
|
$142,701 to $217,450
|
|
33 percent
|
$178,651 to $388,350
|
$217,451 to 388,350
|
|
35 percent
|
All over $388,350
|
All over $388,350
|
The Republicans in Congress would like to extend the 2012 rates into 2013 and later. However, President Obama disagrees. His proposal, shown in the following chart, would preserve the 2012 rates for most taxpayers, except for single people earning more than $203,600 or married taxpayers who make more than $247,000. These taxpayers would have higher top brackets.
Obama’s proposed 2013 tax rates
|
Tax rate |
Single | Married, filing jointly |
|
10 percent
|
Up to $8,950
|
Up to $17,900
|
|
15 percent
|
$8,951 to $36,250
|
$17,901 to $72,500
|
|
25 percent
|
$36,251 to $87,850
|
$72,501 to $146,400
|
|
28 percent
|
$87,851 to $183,250
|
$146,401 to $223,050
|
|
33 percent
|
$183,251 to $203,600
|
$222,051 to $247,000
|
|
36 percent
|
$203,601 to $398,350
|
$247,001 to $398,350
|
|
39.6 percent
|
All over $398,350
|
All over $398,350
|
The crucial point is this: When we’re talking about raising taxes on people earning over $398,350 from a marginal tax rate of 35 percent to 39.6 percent, as President Obama has proposed, the 39.6 percent rate will only apply to income over $398,351.
So a person with $399,351 in income would pay a total tax of $396 on his last $1,000 in income instead of $350 under the old rates — a difference of $46. However, because of adjustments to the lower brackets and other changes, such a taxpayer would pay a total additional tax of $6,513 on all his taxable income under the Obama plan.
It hardly seems worth it to bring the U.S. government to a grinding halt to prevent such a relatively minor increase in taxes on high earners.
