MARGINAL RATES

One of the reasons why I have been a little slow in writing my mini-tutorial on Plato's Gorgias is that I have been doing our taxes.  This is a laborious, complicated, time-consuming effort, not because we are rich [although we are, let me emphasize, extremely comfortable -- upper middle-class, by any rational definition] but because I have a certain amount of royalty income from my books [also from speeches, but nobody very much is asking me to speak these days.]  That requires me to fill out something called Schedule C, which in turn requires that I go back over old credit card bills and our checkbook looking for deductible expenses.

There has been a lot of talk lately in the public world about what Mitt Romney pays in taxes, and also a good deal of debate about raising the tax rate on people who make over a million dollars, or alternatively two hundred and fifty thousand dollars, a year.  And in that debate, there is a great deal of confusion about "marginal rates."  The tax rates are [or are supposed to be] "progressive," which means that the more money you make, the higher your tax rate is on the last or marginal dollars, the top bit of the heap.  Even if you make a billion dollars a year, you pay the same amount of tax on the first ten thousand dollars of taxable income as the person who only has ten thousand dollars of taxable income.  This is obvious, but everybody seems to forget it when the political debates heat up and the bleeding heart Republicans start talking about the poor, benighted rich folks.

Out of curiosity, I decided to figure out our marginal tax rate.  Now, the notion of the marginal dollar of income is a trifle peculiar, since it doesn't mean the dollar you made on December 31st -- the last dollar you made in the year.  It just means some dollar arbitrarily plucked from the pile and treated as "last.". 

The point is this.  When I am finished filling out Schedule C, whose name is "Self-Employment Income," I must then copy the net Schedule C income onto Line 2 of Schedule SE, as well as onto Line 12 of the Form 1040 that everyone fills out [line 1 on Schedule SE is for farmers.]   Schedule SE is used to compute how much Social Security tax I must pay on that Schedule C income, and since I am in theory employing myself ["Self-Employment Income"], I have to pay both the employee's half of the Social Security tax and the employer's half.  In short, I must pay 15.3% of that income, as well as paying income tax on it on Form 1040. 

Now, my marginal tax rate on my Form 1040 net taxable income is 25%.  I don't have very much income in that bracket, but since I can treat any dollar of income as my "marginal income," I can perfectly well construe my royalty income as my marginal income.  Which means that my marginal rate on that income is 25% plus 15.3%, or 40.3%  Then, of course, I have to pay my North Carolina taxes, and in this state, there is a flat 7% tax above a certain rather low level.

Which means that my total over all marginal tax rate, viewed in a certain way, is 47.3%!

But what proportion of my Gross Taxable Income do I actually fork over in taxes?  The answer turns out to be 17.9%, including my North Carolina state taxes.  My Federal Taxes are only 13.7% of my Gross Taxable Income [the number at the very top of the second page of Form 1040.]

The simple truth is that we in the United States are not heavily taxed at all.  Comfortably fixed people in this country -- let us arbitrarily describe them as people living in households whose annual income is twice the median rate of about $50,000 -- could quite easily afford to pay higher taxes to fund Social Security, Medicare, Medicaid, education, and the other collective needs of our society.  And people who make five times, or twenty times, or one hundred times the median household income could afford to pay a great deal more.

So let us hear no more descriptions of folks with $250,000 a year of income as "middle class families in need of tax relief."