unless I am misreading that entirely
You are! Your understanding of how the tax system works is incorrect, but you are far from the only person who has made this mistake.
Unfortunately this mistake is a big one and it is important to understand this. Don't fret, Dr. Dos is on the case.
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The way tax rates work are through brackets. For the sake of example we're going to use some nice tiny numbers to make this easier.
Well do this by using the actual tax brackets of the (fictional) country of Fictiononia.
So here are the Fictionian brackets (in brackets) and the percentage of tax on that income.
[$1-$100] - 10%
[$101-200] - 20%
[$201-300] - 30%
[$301-400] - 40%
[$401-500] - 50%
[$500+] - 75%
Much like the United States, the higher the bracket the higher the tax rate. This is what is known as a
progressive tax.
The opposite of this would be a
regressive tax where the higher the bracket the lower the tax rate. This is a bad thing and while I could wiki to find out where such a tax is used I won't.
Now we are going to observe the incomes of some citizens of Fictiononia.
Lucky Ducky - $50
Joe Sixpack - $210
John Galt - $650
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Lucky Ducky struggles to make ends meet. He works for minimum wage at a department store which is constantly working to keep him working under 40 hours to avoid paying things like health benefits.
Many people are angry with Lucky Ducky for getting things like Food Stamps. Their tax dollars are going to help this shmuck who they believe would be doing much better in life if he had tried a little harder.
Regardless as stated Lucky Ducky has earned
$50 this year. This puts him in the lowest tax bracket of 10%.
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Lucky Ducky's Income Tax Formula
$50 * .10 = $5
So Lucky Ducky will pay
$5 in taxes leaving him with
90% of his income which comes out to
$45.
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Joe Sixpack is your average Fictionian citizen. He finished high school, is married to the lovely Jane Sixpack, and has a son Futuretaxpayer. Joe works as a mechanic. He is skilled in his trade, and business has improved in the small town of Averageville to the point where he's gotten a small raise amounting to $10 more this year than last.
He has earned
$210 this year.
Now, Joe is upset about all this, he voted for Oldman in the past election who promised tax cuts. Unfortunately for him President Fleetfoot won that election.
By making
$210 instead of last year's $200, Joe is pretty upset!
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Joe thinks this is his income tax formula:
$210 * .30 = $63
Joe doesn't want to pay $63 when he got a raise, why with those tax rates he'd be better off making $200 a year instead!
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Pre-raise Joe would think this is his income tax formula:
$200 * .20 = $40
So his $10 raise is costing him $23 in taxes, he'll have less money than if he hadn't accepted the raise!
BUT JOE HAS MADE A FATAL ERROR
Like many Fictionians he misunderstands the tax bracket system.
The tax bracket is not something you fall under. Earning $210 doesn't mean you pay 30% on all $210.
Joe falls under more than one bracket! In fact he falls under three!
[$1-$100] - 10%
[$101-200] - 20%
[$201-300] - 30%
Joe will pay 10% on the first $100 he earns, 20% on the next, and 30% on the last.
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Joe's CORRECT tax formula
($100 * .10) + ($100 * .20) + ($10 * .30) = $33
First $100 Second $100 Last $10
Joe's actual taxes are nearly half of what he and many others would have suspected them to be. The income tax is is more of a spillover, if somebody earns more than the first bracket can hold, they pay the excess moves into the next bracket and only that excess is taxed at a higher rate.
For comparison here are Joe's actual taxes pre-raise and post-raise which includes a new bracket crossover.
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Pre-raise
($100 * .10) + ($100 * .20) = $30
Post-raise
($100 * .10) + ($100 * .20) + ($10 * .30) = $33
So Joe has gotten a $10 raise, and only $3 is lost to taxes.
The net result is Joe will pay
$33 in taxes leaving him with
84% of his income which comes out to
$177.
So hopefully now you have a better understanding of how taxes work. Because the higher rate is only on money earned in that bracket it is
IMPOSSIBLE for getting a raise to result in you taking a net loss after taxes. Unless of course, you have a tax rate of over 100%.
But then there's still Mr. Galt.
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John Galt is one of the wealthiest citizens in Fictiononia. His meat processing plant, Rupture Farms, has earned him $650 this year.
Blah blah
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John Galt's Income Tax
($100 * .10) + ($100 * .20) + ($100 * .30) + ($100 *.40) + ($100 * .50) + ($150 * .75) = $262.50
Yikes! Galt is paying more money in taxes than Joe Sixpack and Lucky Ducky combined have earned.
Why, he only gets
60% of his income leaving him with...
$397.5 more than double what Joe Sixpack has.
So, while it is true that Galt is paying more than anybody else, and keeps the smallest fraction of his money compared to the others, he still has double what they do.
And this is why he should pay more in the higher brackets. Because if the other people are doing fine with that, surely he can do fine with double.
This is also why things like "Fairtax" are anything but. The net result would place the burden on the poor which is not how taxes should work. Those who can pay more without struggling to get by are the ones who should pay more.
Edit: Yeah thanks nick for making my post in one sentence.
Anami: Sex with a giant, black scorpion seems fun.
<SteveThePocket> Geez. I want more of this stuff now. Now I know how a horny guy on an imageboard feels.
Dos
