The Biggest Misconception About Income tax

This video touches briefly on most of the debates concerning income tax. Obviously, it’s a sensationalist title and the discussion itself is reduced to character attacks and shouting, but it’s entertaining and significant nonetheless. I by no means wish to claim that this debate offers the best positions for either side of the discussion, nor do I think it’s the most productive debate on the issue. The reason I picked this debate in particular is because Stuart Varney (The Fox Host) glosses over the issue of marginal tax rates when he says  “federal income taxes and state income taxes add up to a net loss of 50 cents on the dollar for me, for every extra dollar that I earn“. This is the most crucial and most misunderstood fact of income tax brackets. Many people, possibly even the majority, think that it can actually mean a decrease in net income if you move up a tax bracket. This is simply false. The higher marginal income tax rate applies only to the income generated that exceeds the last bracket. Hypothetically, if income under $40k were taxed at a rate of 10%, and I earned $40k, I would pay $4k in income tax. Someone who earns $10 million per year pays that EXACT same rate on their first $40k earned. I think Stuart Varney understands this but he certainly does a good job of obfuscating this fact.

An issue that is relevant to estate tax as well as income tax is the setting of a maximum. Estate tax in the U.S. essentially functions as a flat tax (40%) after $5.49 million. Income tax for 2017 in the U.S. maxes out at 39.6%. I would love to hear a coherent justification for brackets halting at an arbitrary point. Why does the tax rate not increase as income increases? I see no sound justification for why someone earning say, $1 million above the ~$420k bracket should pay the same rate (on the $1 million) as someone earning $1 billion above that bracket. If percentages scale with income up to ~$420k it makes no sense to have them suddenly cap at 39.6%. Sure the percentages would have to level off and increase at an exponentially smaller rate at higher incomes as to not approach 100%, but having the tax become flat arbitrarily past the $420k mark is senseless.

There are, of course many more topics brought up in the video I linked such as capital gains taxes, national deficits, the nature of tax being non-voluntary, etc. I think to even broach these subjects it’s crucial to develop an understanding of commonly held misconceptions that many people share.

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