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Your Marginal Tax Rate

Do you know what your marginal tax rate is? Do you know that the middle class pays the highest marginal tax rates? It's true!

In the following I'm focusing exclusively on ordinary income, and I'm ignoring every kind of deduction, exemption, and credit. I'm just looking at the tax rates and adding it up. I'm also making the assumption of filing as single.

The Oregon income tax is almost a flat tax. There are only three brackets, and the highest bracket is set very low (these are 2003 numbers; I think 2004 is the same):

  • 5% on income ≤ $2,500
  • 7% on income ≤ $6,300
  • 9% on all remaining income

The Federal income tax is strongly progressive and had 6 brackets in 2004:

  • 10% on income ≤ $7,150
  • 15% on income ≤ $29,050
  • 25% on income ≤ $70,350
  • 28% on income ≤ $146,750
  • 33% on income ≤ $319,100
  • 35% on all remaining income

The Payroll taxes are simpler, and are basically flat taxes. Here I use the self-employment figures, which combine the employee and employer portion of the taxes. This is the true rate of the taxes — just because you don't see the employer contribution on your pay stub, doesn't mean it's not wages! (Half of the "self-employment tax" is deductable for income taxes, but as I said, I'm ignoring all deductions.)

  • 12.4% for OASDI (Social Security) on income ≤ $90,000 in 2005
  • 2.9% for HI (Medicare) on all income

Put these all together, and what do you get?

TaxIncome Bracket
$0$2500$6300$7150$29050$70350 $90000$146750$319100
Total30.3%32.3%34.3%39.3%49.3%52.3%39.9%44.9%46.9%
Federal10%15%25%28%33%35%
Oregon5%7%9%
OASDI12.4%0%
HI2.9%

Surprising, isn't it? A marginal dollar between $29,050 and $90,000 — the income range including the middle class and the great majority of taxpayers — is taxed at a highest rate! Higher than the marginal dollar of the very rich! The difference, of course, is the cap on wages subject to Social Security taxes. Escaping from this tax at $90,000 significantly reduces the marginal tax rate.

The cap makes sense: The very rich don't need the government's help to save for their retirement. Make them fully bear the scary risks of the finaicial markets. I hasten to add that I would be thrilled to join them in the scary financial markets instead of throwing 12.4% of my income down the black hole of a system that won't pay me back one thin dime when I retire because it will be means-tested or will have collapsed by then. (And even if the system would be fine, I still want out, because it's a moral abomination.)

Of course, you don't actually pay taxes anywhere near the rates from the table. That's due to all the deductions, exemptions, credits, etc. that I ignored. That's the complexity of the tax code, and explains why a simpler tax system, like a flat tax or a sales tax, would be able to raise the same amount of revenue at a much lower rate.


I haven't mentioned other taxes yet. I pay $0.25/gal in gasoline taxes, $0.24 to the sate and $0.01 to the county. I don't drive very much, so I basically ignore this tax. UPDATE 2005-03-03 06:48:19 UTC: And the federal gasoline tax is $0.184/gal on top of that.

Property taxes can't be reconciled with the above income table, but they're a significant tax that eats through another few percent of income.

There are also auto taxes (licensing, registration), sin taxes, luxury taxes (I think?), utility taxes on telecom, electricity, gas, etc.… It seems everything is taxed, doesn't it? At least Oregon doesn't have a sales tax on top of all the others.

And they tell you the United States is a free country. Arrr, now I've gone and gotten myself depressed…

Tiny Island