T's for Taxes; T's for Tennessee -- Part I (Marginal Tax Rates & Brackets)

No discussion of saving America would be adequate without an examination of taxes. (We’ll leave corporate taxes for another time, and will focus solely on personal income taxes here.)

In short, the 1% have done really, really well under the tax changes of the last 30 years, and the loser has been the federal government and its much ballyhooed deficit.

Let’s start with what we’ve got now. Below are the brackets and marginal rates for a married couple filing jointly in 2011. (All tax charts courtesy of the Tax Foundation.)

2011 Married Filing Jointly
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
10.0%	$0	$17,000
15.0%	$17,000	$69,000
25.0%	$69,000	$139,350
28.0%	$139,350	$212,300
33.0%	$212,300	$379,150
35.0%	$379,150	-

As you can see, taxes are ridiculously high, and if you make more than $379,150, then 35% of your income is going to the federal government.

Actually – that’s not true at all. Many people think the top bracket affects all income, but that’s not how marginal tax rates work. The 35% only affects that portion of income above $379,150. The first $17,000 gets taxed at 10%; the second bracket ($17,001 - $69,000) is taxed at 15%; and so on. In fact, let’s walk through the whole thing, using a very well-off couple who made $600,000.

2011 Taxes on $600,000
Marginal	Tax Brackets		Amount
Tax Rate	Over	But Not Over	Taxed	Tax
10.0%	$0	$17,000	$17,000	$1,700.0
15.0%	$17,000	$50,000	$33,000	$4,950.0
25.0%	$69,000	$139,350	$70,350	$17,587.5
28.0%	$139,350	$212,300	$72,950	$20,426.0
33.0%	$212,300	$379,150	$166,850	$55,060.5
35.0%	$379,150	$600,000	$220,850	$77,297.5
				$177,021.5

Under the current tax regime, a married couple earning $600,000 have an effective tax rate of just under 30% in federal income tax – not 35%.

But there are doubtless people out there who feel 30% is way too high, even for such a well-to-do couple. (For the sake of comparison, the median household income in 2010 was about $50,000, and these folks are rocking twelve times that.) So let’s turn back the clock to 1982, when Ronald Reagan strode the earth. One of his first achievements was the Kemp-Roth tax bill, passed the year before, which both simplified taxes and cut rates dramatically. Here’s what the marginal tax rates looked like back then (and with the dollars adjusted for inflation).

1982 Married Filing Jointly (2011 Dollars)
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
0.0%	$0	$7,906
12.0%	$7,906	$12,788
14.0%	$12,788	$17,671
16.0%	$17,671	$27,670
19.0%	$27,670	$37,203
22.0%	$37,203	$46,969
25.0%	$46,969	$57,199
29.0%	$57,199	$69,523
33.0%	$69,523	$81,846
39.0%	$81,846	$106,493
44.0%	$106,493	$139,511
49.0%	$139,511	$199,035
50.0%	$199,035	-

So … taxes were actually much greater under Reagan. Much, much greater. Here's how our $600,000 couple would have done back then (and all figures are adjusted for inflation).

1982 Taxes on $600,000 (2011 Dollars)
Marginal	Tax Brackets	Amount		Marginal
Tax Rate	Over	But Not Over	Taxed	Tax
0.00%	$0	$7,906	$7,906	$0.00
12.00%	$7,906	$12,788	$4,882	$585.84
14.00%	$12,788	$17,671	$4,883	$683.62
16.00%	$17,671	$27,670	$9,999	$1,599.84
19.00%	$27,670	$37,203	$9,533	$1,811.27
22.00%	$37,203	$46,969	$9,766	$2,148.52
25.00%	$46,969	$57,199	$10,230	$2,557.50
29.00%	$57,199	$69,523	$12,324	$3,573.96
33.00%	$69,523	$81,846	$12,323	$4,066.59
39.00%	$81,846	$106,493	$24,647	$9,612.33
44.00%	$106,493	$139,511	$33,018	$14,527.92
49.00%	$139,511	$199,035	$59,524	$29,166.76
50.00%	$199,035	$600,000	$400,965	$200,482.50
				$270,816.65

Our couple would be forking over almost an extra $100,000, and have an effective tax rate of just over 45%. And this is under Reagan! And people were happy!

There are two big reasons people paid more under Reagan. Firstly, there were a bunch more rates -- the 39%/44%/49%/50% tax brackets just don't exist today at all, and we top out at a measly 35%. Secondly, the brackets haven't kept pace with inflation, with more and more people sliding into lower brackets. 

So … in a nutshell … the reason the deficit has been going up so much is that the amount of money coming in through taxes has been going down so much. 

What's even worse is that the benefits of these tax cuts have been unequally distributed. We saw above how a $600,000 couple makes out like bandits today, but what about someone in the middle? What about that median household with an income of $50,000?

2011 Taxes on $50,000
Marginal	Tax Brackets		Amount
Tax Rate	Over	Taxed	Taxed	Tax
10.0%	$0	$17,000	$17,000	$1,700.0
15.0%	$17,000	$50,000	$33,000	$4,950.0
				$6,650.0

And in 1982?

1982 Taxes on $50,000 (2011 Dollars)
Marginal	Tax Brackets	Amount
Tax Rate	Over	But Not Over	Amount Taxed	Tax
0.00%	$0	$9,258	$9,258	$0.00
14.00%	$9,258	$14,977	$5,719	$800.66
16.00%	$14,977	$20,695	$5,718	$914.88
18.00%	$20,695	$32,404	$11,709	$2,107.62
21.00%	$32,404	$43,569	$11,165	$2,344.65
24.00%	$43,569	$55,006	$6,431	$1,543.44
				$7,711.25

So changes in the tax code saved this household about $1000.  Pro rating this over thirty years means our median household would have saved itself a grand total of $30,000. Our well-off couple, on the other hand, would have saved $3 million dollars.

These numbers are high, though, because the decline in taxes from Reagan to Obama didn't happen all at once. But they show two things: first, taxes were much higher in the good old days and, secondly, that these effects really add up over time. When the government is, in effect, giving the rich $100 in savings for every dollar you get, the rich are going to do really, really well.

And during the 50s, taxes were even higher, and nobody complained. Here are the marginal rates for 1953.

1953 Married Filing Jointly (2011 Dollars)
Marginal	Tax Brackets
Tax Rate	Over	But Not Over
22.2%	$0	$16,807
24.6%	$16,807	$33,615
29.0%	$33,615	$50,422
34.0%	$50,422	$67,230
38.0%	$67,230	$84,037
42.0%	$84,037	$100,845
48.0%	$100,845	$117,652
53.0%	$117,652	$134,460
56.0%	$134,460	$151,267
59.0%	$151,267	$168,075
62.0%	$168,075	$184,882
66.0%	$184,882	$218,497
67.0%	$218,497	$268,919
68.0%	$268,919	$319,342
72.0%	$319,342	$369,764
75.0%	$369,764	$420,187
77.0%	$420,187	$504,224
80.0%	$504,224	$588,261
83.0%	$588,261	$672,298
85.0%	$672,298	$756,336
88.0%	$756,336	$840,373
90.0%	$840,373	$1,260,560
91.0%	$1,260,560	$1,680,746
92.0%	$1,680,746	-

And here's what a couple making $600,00 would have paid in taxes.

1953 Taxes on $600,000 (2011 Dollars)
Marginal	Tax Brackets	Amount	Amount
Tax Rate	Over	But Not Over	Taxed	Tax
22.2%	$0	$16,807	$16,807	$3,731.26
24.6%	$16,807	$33,615	$16,807	$4,134.64
29.0%	$33,615	$50,422	$16,807	$4,874.16
34.0%	$50,422	$67,230	$16,807	$5,714.54
38.0%	$67,230	$84,037	$16,807	$6,386.84
42.0%	$84,037	$100,845	$16,807	$7,059.13
48.0%	$100,845	$117,652	$16,807	$8,067.58
53.0%	$117,652	$134,460	$16,807	$8,907.96
56.0%	$134,460	$151,267	$16,807	$9,412.18
59.0%	$151,267	$168,075	$16,807	$9,916.40
62.0%	$168,075	$184,882	$16,807	$10,420.63
66.0%	$184,882	$218,497	$33,615	$22,185.85
67.0%	$218,497	$268,919	$50,422	$33,783.00
68.0%	$268,919	$319,342	$50,422	$34,287.22
72.0%	$319,342	$369,764	$50,422	$36,304.12
75.0%	$369,764	$420,187	$50,422	$37,816.79
77.0%	$420,187	$504,224	$84,037	$64,708.73
80.0%	$504,224	$588,261	$84,037	$67,229.85
83.0%	$588,261	$672,298	$11,739	$9,743.37
				$384,684.24

So under Obama, the tax load is $177,000. Under Reagan, it was $270,000. And under Eisenhower, it was $384,000 -- for an effective tax rate of 64%.

We don't even have a marginal tax rate of 64% any more. Neither did Reagan! But Eisenhower had marginal tax rates as high as 92%! (This top rate was later reduced to 91%.)

So how do we get out of this mess? More tax brackets -- lots more tax brackets. And higher marginal tax rates. Right now, a hedge fund manager making a billion a year (and in 2010, there were six of them, and they made a total of $15.1 billion, the equivalent of 302,000 median household incomes) pays the same top marginal tax rate as a couple making $360,000. 

That's ... insane. But we can fix it. And using Reagan's tax code is a pretty good place to start. 

But would taxing the well off make that much of a difference? According to Krugman:

The I.R.S. reports that in 2007, that is, before the economic crisis, the top 0.1 percent of taxpayers — roughly speaking, people with annual incomes over $2 million — had a combined income of more than a trillion dollars. That’s a lot of money, and it wouldn’t be hard to devise taxes that would raise a significant amount of revenue from those super-high-income individuals. 

For example, a recent report by the nonpartisan Tax Policy Center points out that before 1980 very-high-income individuals fell into tax brackets well above the 35 percent top rate that applies today. According to the center’s analysis, restoring those high-income brackets would have raised $78 billion in 2007, or more than half a percent of G.D.P. 

I’ve extrapolated that number using Congressional Budget Office projections, and what I get for the next decade is that high-income taxation could shave more than $1 trillion off the deficit. 

... 

So raising taxes on the very rich could make a serious contribution to deficit reduction. Don’t believe anyone who claims otherwise.

And that's just on the top 0.1 percent.

Disclaimer: The brackets above cannot be used to calculate actual tax liabilities without including other factors, most notably -- deductions. But they are indicative of tax liabilities over time, and between the well-off and the just-getting-by.