Taxation and What We Really Pay
Date: 2020-03-29 · Word Count: 1017 · Reading Time: 5 minutes
I was having a conversation with a friend about tax rates and the idea that we should go back to higher rates (say, what was done in the 1940’s and 1950’s). I’ve seen a lot of confusion about what this means and what kind of effect it has on the amount of money you keep at the end of the day. So, I wrote up this table showing the tax rates from 1944 (paid in 1945) and then converted 1944 dollars to 2020 dollars to build a comparison table.
1944 Dollars
| Percentage | Floor | Tax in Bracket | Total Paid | Money Left |
|---|---|---|---|---|
| $0 | ||||
| 23% | $2,000 | $460 | $460 | $1,540 |
| 25% | $4,000 | $500 | $960 | $3,040 |
| 29% | $6,000 | $580 | $1,540 | $4,460 |
| 33% | $8,000 | $660 | $2,200 | $5,800 |
| 37% | $10,000 | $740 | $2,940 | $7,060 |
| 41% | $12,000 | $820 | $3,760 | $8,240 |
| 46% | $14,000 | $920 | $4,680 | $9,320 |
| 50% | $16,000 | $1,000 | $5,680 | $10,320 |
| 53% | $18,000 | $1,060 | $6,740 | $11,260 |
| 56% | $20,000 | $1,120 | $7,860 | $12,140 |
| 59% | $22,000 | $1,180 | $9,040 | $12,960 |
| 62% | $26,000 | $2,480 | $11,520 | $14,480 |
| 65% | $32,000 | $3,900 | $15,420 | $16,580 |
| 68% | $38,000 | $4,080 | $19,500 | $18,500 |
| 72% | $44,000 | $4,320 | $23,820 | $20,180 |
| 75% | $50,000 | $4,500 | $28,320 | $21,680 |
| 78% | $60,000 | $7,800 | $36,120 | $23,880 |
| 81% | $70,000 | $8,100 | $44,220 | $25,780 |
| 84% | $80,000 | $8,400 | $52,620 | $27,380 |
| 87% | $90,000 | $8,700 | $61,320 | $28,680 |
| 90% | $100,000 | $9,000 | $70,320 | $29,680 |
| 92% | $150,000 | $46,000 | $116,320 | $33,680 |
| 93% | $200,000 | $46,500 | $162,820 | $37,180 |
| 94% | Over $200,000 |
2020 Dollars
| Percentage | Floor | Tax in Bracket | Total Paid | Money Left |
|---|---|---|---|---|
| $0 | ||||
| 23% | $29,400 | $6,762 | $6,762 | $22,638 |
| 25% | $58,800 | $7,350 | $14,112 | $44,688 |
| 29% | $88,200 | $8,526 | $22,638 | $65,562 |
| 33% | $117,600 | $9,702 | $32,340 | $85,260 |
| 37% | $147,000 | $10,878 | $43,218 | $103,782 |
| 41% | $176,400 | $12,054 | $55,272 | $121,128 |
| 46% | $205,800 | $13,524 | $68,796 | $137,004 |
| 50% | $235,200 | $14,700 | $83,496 | $151,704 |
| 53% | $264,600 | $15,582 | $99,078 | $165,522 |
| 56% | $294,000 | $16,464 | $115,542 | $178,458 |
| 59% | $323,400 | $17,346 | $132,888 | $190,512 |
| 62% | $382,200 | $36,456 | $169,344 | $212,856 |
| 65% | $470,400 | $57,330 | $226,674 | $243,726 |
| 68% | $558,600 | $59,976 | $286,650 | $271,950 |
| 72% | $646,800 | $63,504 | $350,154 | $296,646 |
| 75% | $735,000 | $66,150 | $416,304 | $318,696 |
| 78% | $882,000 | $114,660 | $530,964 | $351,036 |
| 81% | $1,029,000 | $119,070 | $650,034 | $378,966 |
| 84% | $1,176,000 | $123,480 | $773,514 | $402,486 |
| 87% | $1,323,000 | $127,890 | $901,404 | $421,596 |
| 90% | $1,470,000 | $132,300 | $1,033,704 | $436,296 |
| 92% | $2,205,000 | $676,200 | $1,709,904 | $495,096 |
| 93% | $2,940,000 | $683,550 | $2,393,454 | $546,546 |
| 94% | Over $2,940,000 |
As you can see, while the 94% marginal rate sounds scary, it doesn’t impact most people (90.85% of people earn less than $100,000). Looking at the closest bracket where the tables align, 88.85% of people earn less than $88,200 and thus will only hit the 29% bracket, taking home up to $65,500 of that money if they earn the maximum for the bracket.
Looking at this another way, let’s consider a few different groups and what they’ll be taxed:
The fight for 15 is pushing to have a $15/hour minimum wage. At the standard 2,080 hours in a work year that’s only $31,200 and this person will be paying:
- $6,762 in taxes for the first $29,400
- $450 in taxes for the remaining $1,800
- A total of $7,212 in tax, leaving $23,988
The median high school graduate only earns $38,100 and would thus pay:
- $6,762 in taxes for the first $29,400
- $2,175 in taxes for the remaining $8,700
- A total of $8,937 in tax, leaving $29,163
Even the relatively few (only around 9% of the population) who have a professional degree and earn an average of $117,679 aren’t going to find themselves anywhere near the higher brackets and are going to keep the majority of their money, paying only around $32,340 in taxes and keeping $85,260.
Now let’s look at someone who’s extremely well off, earning $10,000,000 per year.
They’re going to pay:
- $2,393,454 in taxes for the first $2,940,000
- $6,636,400 in taxes for the remaining $7,060,000
- A total of $9,029,854, leaving $970,146
As you can see, that’s how we actually fund huge projects (universal healthcare, the interstate highway systems, the space race), by getting those who earn the most to contribute the most, recognising that they wouldn’t be successful without the rest of society and requiring them to contribute back to it proportionally. Note that it definitely doesn’t leave those earning millions in a bad way, it just limits what can be kept for oneself so that the majority of people are living within more similar means. And if you’re thinking “hey, if I become rich I’d certainly like to be able to keep it all”, consider whether you’d have trouble living off almost a million dollars a year and if the rest of that wouldn’t be better used to ensure the rest of society is healthy and well educated.
Just for giggles, let’s compare to the current rates:
2020 Tax Brackets
| Percentage | Floor | Tax in Bracket | Total Paid | Money Left |
|---|---|---|---|---|
| $0 | ||||
| 10% | $9,700 | $970 | $970 | $8,730 |
| 12% | $39,475 | $3,573 | $4,543 | $34,932 |
| 22% | $84,200 | $9,840 | $14,383 | $69,818 |
| 24% | $160,725 | $18,366 | $32,749 | $127,977 |
| 32% | $204,100 | $13,880 | $46,629 | $157,472 |
| 35% | $510,300 | $107,170 | $153,799 | $356,502 |
| 37% | Over $510,300 |
As we can see here, the difference is staggering.
Let’s take our $10,000,000 earner again:
- $153,799 in taxes for the first $510,300
- $3,511,189 in taxes for the remaining $9,489,700
- A total of $3,664,988, leaving $6,335,012
So in one case, we have this person being left with over 6 million, an amount most people would have difficulty spending in a year. In the other scenario, they get to keep almost a million, a substantial amount, and then the rest of the money goes into funding public works.
For those who think spending that much money is easy, consider that staying at a luxury hotel at $400/night will set you back only $142,400. Even if you eat at 3 star Michelin restaurants every night at an average of $500 per meal, that’s another $182,500 and you’ve still only just broken through $300,000. Maybe, the first year you buy a house, but you really only need one or two of those, plus maybe an expensive car, and after that it becomes really difficult to spend that much money.
Another argument that I hear on occasion is that is prevents people who really do want to get rich from doing so. Remember that John Paul Getty was a billionaire in the 1950’s despite these taxation levels (a billion at that time being worth over 14 billion today).