Marginal Tax Rates
As Republicans attempted to ramrod a major bill through Congress recently, much of the focus shifted from the effect the bill would have on health care (the ostensible subject of the legislation), to the way the bill would benefit the wealthy by lowering their taxes.
 
  • Note: In general, for tax purposes there are three types of income: earned income, unearned income and long-term capital gains. Earned income is (surprise! surprise!) what you earn. Unearned income is money you receive from such sources as dividends on investments, interest on bank accounts, short-term capital gains, and pensions. Long-term capital gains is money received when an asset—a building or investment, for instance—is sold at a profit after having been held for more than a year. Typically, this rate is lower than the rate on earned and unearned income.   
 
For a little context in deciding whether the high income contingent needs a tax break, consider the vagaries of the marginal tax rate, the rate paid by the highest-income people in the country—on their earned income over the years.
 
Since the advent of the income tax in 1913, the lowest the marginal rate on earned income for a single taxpayer has ever been was 7% (1913 to 1915), when the threshold for falling into that elevated bracket was $500,000. The highest the rate has been was (brace yourself!) 94% on the amount over $200,000 as World War II ground on in 1944 and ’45. My guess is that in that mid-century world we still subscribed to the naïve notion that we should attempt to pay as we go instead of passing the bill on to our hapless descendants. Currently, the marginal tax rate is 39.6% which kicks in on income exceeding $418,400.
 
Like the income tax rate, the tax on long-term capital gains, a major source of income for the upper echelon, has varied from a low of 12.5% from 1922-33 to a high of 77% in 1918. Currently, it’s 25%.
 
This, of course, is an oversimplification of the tax code, but it gives you a rough idea of the scene. Any budget document is a values document. What does the federal budget say about our collective values? See my quick take on health care and tax cuts here.