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American Income Tax System

American Income Tax System. Mr. Way, 3/5/12 Economics 12.3.3 Describe the aims of government fiscal policies (taxation, borrowing, spending) and their influence on production, employment, and price levels. What is a Progressive Tax?.

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American Income Tax System

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  1. American Income Tax System Mr. Way, 3/5/12 Economics 12.3.3 Describe the aims of government fiscal policies (taxation, borrowing, spending) and their influence on production, employment, and price levels.

  2. What is a Progressive Tax? • Liberal-Progressives will tell you that progressive taxes are called that because they represent social progress. • The real reason is because you pay a progressively higher percentage of your income in tax as your income rises. • This is the inverse of a regressive tax, where you pay a higher portion of your income the less you make.

  3. Example of a Progressive tax • Below is a chart showing our federal tax rates for 2012:

  4. What is a “marginal tax rate?” • This is a system in which you only pay higher tax rates on money earned past each bracket. • If this weren’t the case, somebody could end up getting less money after receiving a raise because their tax rate increased.

  5. Calculating Taxes Example #1 • Take somebody who makes 10k per year: • 10k is in the second tax bracket, 15% • All the money they made in the first bracket (0-8700) is only taxed at the 10% rate. Money after 8700 is taxed at 15% • Their tax is calculated as: 8.7k(10%) + (10k – 8.7k) (15%) = 870 + 195 = 1065A grand total of 10.6%

  6. Calculating Taxes Example #2 • Now suppose somebody makes 100K • This is the 4th bracket (28%). Behold: • 8700 (10%) + (35350 – 8700) (15%) + (85650 – 35350) (25%) + (100k – 85650)(28%) =870 + 4000 + 12575 +4018 = 21,460 • A grand total of 21.46%

  7. Calculating Taxes example #3 • What about somebody making 1 million? • 8700 (10%) + (35350 – 8700) (15%) + (85650 – 35350) (25%) + • (178650 – 85651) (28%) + • (388350 – 178650)(33%) + • (1,000,000 – 388350) (35%) = • $326,761, or a grand total of 32.7%

  8. There’s more? Are you freakin’ kidding me? • That was just the Federal income tax (simplified)You didn’t think California would let you by without taking a cut, too, did you? • Each state has different laws, programs, and agencies. Therefore, each state has different costs, with some (like CA) higher than others. • Each state chooses how to pay for its costs through mixtures of various kinds of taxes, notably income, property, & sales.

  9. Where can you dodge state income taxes? • Red states have no state income tax. Yellow states only tax dividends and interest.Gray states have either a progressive or a flat tax.

  10. California Income Tax • Below is a chart showing our state tax rates for 2012:

  11. Calculating Total Tax Rates • First calculate federal income tax. • Then follow the same formula of progressive taxation using California’s rates. • Add the two together, and you find your total tax rate (God help you if your City has an income tax, too!) • In CA, people making over $250,000 end up paying a whopping 42% of their income in taxes. • Imagine being paid only 58 cents for every dollar you earn, and then being told you (the top 1% of income earners) aren’t paying your fair share!

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