Tax Brackets

The reduction from 15 brackets to two brackets (15% and 27%) does not mean that you will suddenly pay nearly twice as much tax if your taxable income increases $2 from $29,299 to $29,301. Only the amount over $29,300 pays the higher rate. From $5,001 to $29,300 pays the 15% rate. The first $5,000 of taxable income for a married couple ($3,000 for a single) is not taxed at all. And remember that “taxable income” is not the same as your salary; all itemized deductions and $2,000 exemption per family member have been subtracted first.

The expression “tax bracket” refers to the marginal tax rate on your last dollars, not on the first or middle dollars. In past years your income has been taxed in as many as 15 little “brackets,” and it does not all go sloshing into the highest one when you get a salary raise. Especially given the proposed drop in the maximum rate from 50% to 27%, the elimination of 13 other brackets is just simplifying the math. Under current law, the 12% bracket exists to collect about $22 more from marrieds and $10 more from singles than the 11% bracket takes in. Though the tax tables provided with your forms do most of the work, there really was no benefit to the government or taxpayer in arriving at your total tax by 16 different percentages.

The idea of a progressive tax system has been just that--an idea--for some time. A Brookings Institution study authored by Joseph Pechman before the Reagan 1981 tax cuts and Social Security tax increases showed that the poorest in America paid on average about 27% of their incomes in taxes of all types, and the richest paid about 32%. In fact, middle-income Americans paid slightly more than the richest. The small gap in average tax rates has probably been closed in the 1980s, giving rich and poor “equality” at about 30%.

The rich have faced nominal marginal rates of 92%, then 70%, and currently 50%, but have sheltered enough of their incomes to arrive at an average tax near 30%. The Packwood tax bill only ratifies what has always existed in reality. Basically, the rich have said, “One way or another, we’re going to beat those high rates, so you might as well drop them.” Now they have.

JOEL C. TAUNTON

Los Angeles