The Progressive Tax System
Since it was first enacted during the Civil War, our income tax has been revised to use a “progressive” system. This is based on the theory that the national tax burden should be shared according to a taxpayer’s ability to pay.
Thus, low-income taxpayers pay lower taxes than high-income taxpayers. The difference is not just the total amount of tax. The tax per dollar of income increases with the amount of income. For everybody, the first dollar of income is taxed at the same rate. But as income increases, the last or highest dollar is taxed at a progressively higher rate.
Inflation Affects Tax Brackets for 2022
Historically, our income tax system has imposed a broad range of marginal rates. Following World War II, the highest marginal rate was 90%. It stayed at 70% in the 1960s. It was gradually reduced to the present 37%.
Present law has seven income brackets that differ depending on income as well as tax status: single, married filing jointly, or head of household. The tax rates for the seven income brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
While the tax rates were unchanged between 2020 and 2021, the bracket amounts were increased, effectively resulting in a tax reduction. For a single taxpayer, the 2020 marginal rate for an income of $164,000 was 32%. But for 2021, it is 24% (an 8-point reduction). For 2020, the marginal rate for $86,000 was 24%, but for 2021 it is 22% (a 2-point reduction).
In what seems like a deviation from progressive tax policy, higher-income taxpayers got a proportionately larger tax break than lower-income taxpayers.
For the 2022 tax year, the IRS announced more adjustments designed to match inflation. The highest marginal rate is still 37%, but it kicks in at incomes over $539,900 for individuals. The other brackets are as follows:
• 35% for more than $215,950 ($431,900 for married couples filing jointly)
• 32% for more than $170,050 ($340,100 for married couples filing jointly)
• 24% for more than $89,075 ($178,150 for married couples filing jointly)
• 22% for more than $41,775 ($83,550 for married couples filing jointly)
• 12% for more than $10,275 ($20,550 for married couples filing jointly)
• 10% for incomes of single individuals with incomes of $10,275 or less ($20,550 for married couples filing jointly)
Gross Income vs. Taxable Income
The tax brackets are based on taxable income, not gross income. The progressive income tax is imposed on taxable income. Taxable income is gross income reduced by deductions and exemptions of many kinds.
Congress has used the tax system effectively as a device for “off-the-books” government subsidies rather than direct expenditures. For example, deductions for intangible drilling costs (which would ordinarily be capitalized) are an effective government subsidy for oil and gas exploration.
Such measures are called “tax expenditures” or “tax subsidies.” When the government forgoes income taxes because of special deductions or credits, it has the same fiscal effect as a direct subsidy.
Nominal vs. Effective Tax Rates
The real measure of the fairness of a progressive tax system is not the tax brackets. Rather, it is the rate at which a taxpayer’s gross income is effectively taxed.
Everybody is aware that many rich people with millions of dollars in annual income pay a very small percentage of their total income or no tax at all. They can legitimately take advantage of tax subsidies that low- and middle-income people cannot.
Such is a deviation from the policy of a progressive tax system.
Our income tax laws are complex. Tax brackets and progressive tax rates are part of the system. But your effective tax rate is largely determined by deductions to reach your taxable income base. Friedman Accounting in Parkland Florida, can help you achieve the lowest legal effective tax rate.