The middle “yellow” section of this chart shows the ordinary income tax brackets passed under Bush in 2003 and extended until the end of 2012 by Obama. The bracket dollar amounts are adjusted for inflation each year so I show 2014 dollars here. In the right blue column, you’ll see the current Obama rates that began in 2013. Despite all the “socialist” rhetoric, Obama returned to the Clinton rates of 39.6% (on ordinary income) and 20% (on capital gains) ONLY for the top 1%. Ideally, we should have at least returned to the Clinton rates for the top 2% — with the 33% rate returning to the 36% rate.
The important thing to remember is that no matter how much total income a household has, the taxable income that falls in each bracket is taxed at the same rate for everyone. So, for example, even Oprah pays only 10% on her first $9,075 of taxable income, 15% on the amount between $9,076 and 36,900, and so forth. And if she married Stedman, they’d use the brackets on the left for married couples.
Let’s do an example. (Thank you to Brainwrap’s Daily Kos classic diary for inspiring this example: http://www.dailykos.com/... )
Suppose Suzy, a single person, has $89,351 of taxable ordinary income (after all deductions), she would owe:10% on the first $9,075 = $907.50 plus 15% on the $27,825 between $9,076 and $36,900 = $4,173.75 plus 25% on the $52,450 between $36,901 and $89,350 = $13,112.50 plus 28% on that last $1 between $89,351 and $186,350 = $0.28 = Grand total of $18,194.03 Notice that the last dollar does NOT push all Suzy’s income into the 28% bracket, which would mean her tax would be 28% of $89,351 = 25,018.28 — almost $7,000 more than her actual tax. This is a fundamental misunderstanding most folks have about our federal tax system. Even though they are not paying it, Americans mistakenly believe their tax rate is way higher than it actually is. Suzy’s blended rate is actually closer to 20%. And that’s not even counting all her deductions from total income, which we’ll address in another post.
Rest assured, even Turbo-tax will calculate it correctly for you with the press of a button. Here’s how TurboTax explains our example: For single income between $89,351 and $186,350, the tax is $18,193.75 plus 28% of the amount over $89,350.In short, the progressively in the tax code — the seven marginal brackets — make the tax code a bit more fair, but hardly more complicated. No, what makes the tax code infinitely complicated are all those deductions… What counts as “taxable income”?