216 lines
11 KiB
Markdown
216 lines
11 KiB
Markdown
---
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created_at: '2010-05-12T23:29:22.000Z'
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title: Marginal income tax rates for a single California resident (2007)
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url: http://dbaron.org/views/taxes-2007.html
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author: tomsaffell
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points: 56
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story_text: ''
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comment_text:
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num_comments: 80
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story_id:
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story_title:
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story_url:
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parent_id:
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created_at_i: 1273706962
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_tags:
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- story
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- author_tomsaffell
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- story_1342635
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objectID: '1342635'
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year: 2007
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---
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# Marginal income tax rates for a single California resident with only wage income, 2007
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As I did some taxes this year (March 2008), going through some of the
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forms (by hand, as I always do, partly since I like to understand what
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it is that I'm paying) made me realize how bizarre our tax system is.
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Consider the following relatively simple example: a single
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(non-dependent) person in California earning all of his income from
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wages, salaries, and tips. (Once antipoverty programs like the Earned
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Income Credit aren't relevant, this assumption could be relaxed to allow
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income from many other sources as well, although capital gains are taxed
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differently.) Assume further that this person's withholding is perfect
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so that they can deduct exactly their 2007 state taxes from their
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federal returns once they get to the point of itemizing deductions
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(rather than having some variation from year to year due to imperfect
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withholding). Consider the effect of the following taxes:
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- US Income Tax
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[progressive
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rate](http://www.irs.gov/pub/irs-pdf/i1040tt.pdf#page=13) with some
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initial income excluded due to subtracting standard deduction and
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exemption amounts, with deductions
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[itemized](http://www.irs.gov/pub/irs-pdf/i1040sa.pdf) once it
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becomes worth itemizing deductions (rather than taking the standard
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deduction) based on state taxes paid alone (see two California taxes
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below)
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- Social Security Tax
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6.2% of income under $97500 (ignoring that it's really double that
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because the employer pays the same)
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- Medicare Tax
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1.45% of income (ignoring that it's really double that because the
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employer pays the same)
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- US Alternative Minimum Tax
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A [separate progressive tax
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structure](http://www.irs.gov/pub/irs-pdf/f6251.pdf) that allows
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fewer deductions, forcing rich people to give up some of their
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itemized deductions if this structure produces a larger tax than the
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normal tax structure.
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- California Income Tax
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[progressive
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rate](http://www.ftb.ca.gov/forms/07_forms/07_540tt.pdf#page=6) with
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some initial income excluded due to subtracting the standard
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deduction and exemption amounts
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- California State Unemployment/Disability Insurance
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0.6% of income under $83388.33
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- Earned Income Credit
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A federal antipoverty program that subtracts from income tax
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(potentially making it negative). Doesn't pay much to people without
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children, so doesn't figure much here.
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This yields the marginal rates shown in the following graph:
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And here's a zoom of the part of the graph under $100,000:
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One way to understand what this graph represents is that if a person
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meeting these conditions drew a vertical line at his income, the area to
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the left of that line would be everything he earned. The part below the
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line drawn would be the part paid in taxes, and the part above would be
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the part he keeps.
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**\[ Edit, May 12, 2010 --** The reason I called these graphs bizarre
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isn't the magnitude of the numbers; they're in the range one would
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expect for funding a modern government. What's bizarre about these
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graphs is their shape. There is no good reason for this graph to have
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lots of bumps in it. I'd expect a line that's gradually increasing
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(perhaps stepwise), not one that goes up and down a lot. I think the
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bumps are a result of the bad process we use for making policy. **-- end
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Edit\]**
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The details of these marginal rates are:
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1. Thanks to standard deductions and dependent exemptions (since the
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taxpayer has himself as a dependent), both federal and California
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income taxes don't kick in immediately. However, the Earned Income
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credit does (at a rate of -7.65%), so the initial marginal rate is
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**0.6%** when subtracting that credit from the other three taxes.
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(This ignores other antipoverty programs, though.)
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2. Around **$5550** (where the total tax paid is around $33.30), the
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Earned Income Credit changes to a flat $428, bringing the marginal
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rate up to the rate of Social Security plus Medicare plus California
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SUI/SDI, which is **8.25%**.
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3. Around **$7000** (where the total tax is around $150), the Earned
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Income Credit starts decreasing. (This is for single people; for
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people with children it's still increasing (not even flat yet) at
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this income level.) This brings the marginal rate up to **15.9%**.
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4. At **$8750** (where the total tax is around $428), we've used up the
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federal standard deduction and 1 exemption, so federal income taxes
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kick in at 10%, making the marginal rate **25.9%**
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5. At **$11629** (where the total tax is around $1174), we've used up
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California's standard deduction ($3516) and the $94 after-tax
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exemption for supporting oneself, so California income taxes kick in
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at a marginal rate of 2%, making the total marginal rate **27.9%**.
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6. At **$12590** (where the total tax is around $1442), the Earned
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Income Credit has hit 0, so the total marginal rate drops to
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**20.25%**.
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7. At **$16575** (where the total tax is around $2249), the federal
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income tax rate goes up to 15%, so the total marginal rate is
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**25.25%**
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8. At **$19701** (where the total tax is around $3038), the California
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income tax rate goes up to 4%, so the total marginal rate is
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**27.25%**
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9. At **$29060** (where the total tax is around $5588), the California
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income tax rate goes up to 6%, so the total marginal rate is
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**29.25%**
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10. At **$38976** (where the total tax is around $8489), the California
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income tax rate goes up to 8%, so the total marginal rate is
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**31.25%**
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11. At **$40600** (where the total tax is around $8996), the Federal
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income tax rate goes up to 25%, so the total marginal rate is
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**41.25%**
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12. At **$48330** (where the total tax is around $12185), the California
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income tax rate goes up to 9.3% (the top bracket), so the total
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marginal rate is **42.55%**
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13. At **$80460.81** (where the total tax is around $25857), total
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payments of income taxes to California now equal the federal
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standard deduction ($5350), so it becomes worth itemizing deductions
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on federal taxes. The marginal rate for total California taxes is
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9.9%. This means that 9.9% of each additional dollar doesn't count
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towards federal income tax, reducing its effective marginal rate
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from 25% to 22.525%, making the total marginal rate **40.075%**.
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14. At **$83388.33** (where the total tax is around $27030), the maximum
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payment into California state disability and unemployment insurance
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($500.33) is paid. This, in turn, reduces the total marginal rate of
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state taxes to 9.3%, which increases the effective federal income
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tax marginal rate (remember the last step) to 22.675%, making the
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total marginal rate **39.625%**
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15. Around **$86421.96** (where the total tax is around $28232), the
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Federal income tax rate goes up to 28%. Remember we're deducting
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9.3% of income, though, so the total marginal rate is **42.346%**
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16. At **$97500** (where the total tax is around $32923), Social
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Security taxes stop, so the total marginal rate is **36.146%**
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17. At **$156400** (where the total tax is around $54215), Federal
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exemption and deduction limiting kicks in, the former in a series of
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discrete jumps of $12.69 each (1.181333% slope), and the latter
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continuously (at a 7.3% slope). Around the same point (actually the
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first step is at $156666, but treating it as a continuous function
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it starts at $155416), California exemptions start being limited as
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well. Since this is a very small effect: a series of $4.32 steps for
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every increment of $2500 in income ($6 more in California tax, minus
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the offset that causes in Federal tax), I'll just throw it in here
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as well. Treating all of these as continuous, this makes the total
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marginal rate around this point change to approximately **37.39%**.
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18. At an income of **$177914.32** (where the total tax is around
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$62258), the Federal tax rate goes up to 33%, changing the total
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marginal rate to approximately **42.1%**.
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19. At an income of **$190153.08** (where the total tax is around
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$67411), the alternative minimum tax kicks in (with the alternative
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structure passing the regular income tax structure), and the total
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marginal rate changes to **43.49%**. Note that even with small
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amounts of income from capital gains, this can happen at
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significantly lower income, because the alternative minimum tax's
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steep exemption phaseout does include capital gains (whereas almost
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nothing else does).
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20. Around an income of **$194582.66** (assuming a continuous function,
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which it really isn't), the California exemption hits zero (so the
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gradual limiting stops), and the marginal rate drops to **43.25%**.
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21. At **$197980** (where the total tax is around $70807), the
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alternative minimum tax rate jumps from 26% to 28% (though the
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effective rate is larger, jumping here from 32.5% to 35%, since the
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AMT exemption limiting is still being phased in), making the total
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marginal rate now **45.75%**.
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22. At **$289900** (where the total tax is around $112860), the AMT
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exemption is now limited down to zero, which makes the federal
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income tax marginal rate drop to the AMT's official 28%, making the
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total marginal rate now **38.75%**.
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23. At **$409665.88** (where the total tax is around $159269), the
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regular federal income tax rate schedule (with its now higher
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marginal rates) crosses above the alternative minimum tax again,
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making the total marginal rate now **43.195%**. This is the marginal
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rate on income from this point up (given these very simple
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assumptions).
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I probably made a whole bunch of mistakes here, never mind the major
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pieces I omitted, but this seesaw graph starts to paint a picture of the
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US tax system. It has so many details and patches to fix little things
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that the big picture is a mess.
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I think I'd probably prefer a graduated (and actually progressive) tax
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on consumption (allowing major purchases like houses and cars to be
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treated as investments, consuming only the fair market value of the
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opportunity cost of not renting it). This could be done through a
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mechanism similar to the one we have now (but simpler), except where
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savings are deductable and loans are taxable.
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See the [Haskell program](taxes-2007.hs) that I used to figure a bunch
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of this out, as well as the [data](taxes-2007.csv) and [R
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code](taxes-2007.r) that I used for the plot.
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[David Baron](http://dbaron.org/), <dbaron@dbaron.org>, 2008-03-17
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