Marginal Tax Rates

Yea! Tax reform has passed.  It is mostly about the business side but the GOP has ended up with a reasonable bill on the personal side as well.  Of course the problem is that all the Democrats voted against reducing individual and business taxes so they need to try to explain their position. Jibran Khan (spell check does not like his first name!) has a useful summary over at NRO.

But is is easy to mess up.  Jim Geraghty’s Morning Jolt has this:

Looking at this chart, if you’re married and your joint taxable income is between $400,000 and $416,000 [actually $416,700], your tax rate is changing from 33 percent to 35 percent. (Quick, get your taxable income down to $399,000! Your tax rate will drop to 32 percent!)

Perhaps Jim is being sarcastic but the table isn’t really very useful unless you have an arithmetic addiction like your humble scribe.  Tax rates are marginal so the couple in Jim’s example would pay two percent more on $16,000 of their income or $320 but they would save money on almost every other dollar of taxable income except for the first $18,650.  Situations will vary because the new law changes the computation of taxable income but in the situation that Jim described the couple’s tax would be lowered by $15,558 under the new law.  Remember, tax rates are always marginal.

Essentially ever individual will pay lower taxes under tax reform.  Here is a CATO study that gussies up the results to allocate corporate tax benefits to individuals.  Because there are changes to rates and deductions there might be a few exceptions.  There won’t be many and anybody who says otherwise is misinformed.  And folks will continue to be confused about marginal rates and average rates.


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