Comments on: Marginal Versus Average Tax Rate Figures

By: Ian Crosby

Ian Crosby — Thu, 19 Nov 2009 18:45:04 +0000

The larger point is that so many people just don’t get the concept of marginal vs. effective rates of taxation. Witness the man-in-the street interviews from last year’s election with people concerned about holding their income below $250k if Obama were elected, as if the higher marginal tax rates he proposed would somehow apply to all of their income if they exceeded that threshold.

By: Austin Frakt

Austin Frakt — Thu, 19 Nov 2009 16:50:54 +0000

@TFB – Thanks. That’s what I thought. My question was largely rhetorical. It was meant to cause readers to contemplate why it isn’t that easy to produce figures like the ones I did that include FICA and are also perfectly accurate and relevant to all taxpayers.

By: TFB

TFB — Thu, 19 Nov 2009 16:32:35 +0000

“Does FICA apply to the same base (taxable income on the 1040) as federal taxes?” – No. FICA applies to wages and self-employment income.

By: Austin Frakt

Austin Frakt — Thu, 19 Nov 2009 15:36:29 +0000

@TFB – Indeed, which is why I had written “federal income tax” in the post. But I take your point and updated the post to make it explicit that payroll and state taxes are not included. Payroll taxes wouldn’t be hard to add. State taxes would have to be considered individually. I’m not going to produce 50 to 100 graphs, and the spreadsheet is available so anyone is free to improve or personalize this. (As I said, I did these for my own need and am providing them because I can.)

Having said all that, over a broad range FICA is a flat tax. Same goes for many state taxes. In such cases they would add a vertical shift to the figures. The shapes of the curves would remain the same.

Although, there is a complexity that I avoided but one you may have to consider to do FICA right and perhaps some state taxes. The base may be different. Does FICA apply to the same base (taxable income on the 1040) as federal taxes? Are there no deductions that result in a taxable income below that which is hit by payroll taxes?

By: TFB

TFB — Thu, 19 Nov 2009 14:02:13 +0000

Like so many other articles on this subject, you are not showing the true marginal and average tax rates. The true marginal and average tax rates include FICA and state and local taxes.