Well-known leftist politicians are proposing ideas for major income tax hikes, such as adding a new top rate of 70 to 80 percent on the very rich. But JLF’s Roy Cordato explains that the the tax hit would impact many more people than just those earning $10 million or more.

Under our current tax system, the top marginal rate is 37 percent and, for single taxpayers, it kicks in for all income above $500,000. This doesn’t mean that everyone who earns over $500,000 pays 37 percent on all of his or her income. At different segments of income below that amount, the taxpayer pays successively lower rates. The lowest rate is 10 percent, and it is paid on the first $9,225 of taxable income (gross income minus allowable exemptions and deductions). The table below provides a concise explanation of how the system works up to $500,000 when the 37 percent top rate kicks in.

Tax rate Taxable income bracket Tax owed
10% $0 to $9,525 10% of taxable income
12% $9,526 to $38,700 $952.50 plus 12% of the amount over $9,525
22% $38,701 to $82,500 $4,453.50 plus 22% of the amount over $38,700
24% $82,501 to $157,500 $14,089.50 plus 24% of the amount over $82,500
32% $157,501 to $200,000 $32,089.50 plus 32% of the amount over $157,500
35% $200,001 to $500,000 $45,689.50 plus 35% of the amount over $200,000
37% $500,001 or more $150,689.50 plus 37% of the amount over $500,000

This is how most progressive rate systems work. The rates increase as one’s income goes up without a sizable difference in rate from one bracket to the next. And this is true everywhere that has such a system.

When one crosses from one bracket to the next, the marginal tax rate increase is relatively small. The only exception is at the very low end when income jumps from $38,700 to $82,500. But even here earners will go from being able to keep $0.88 of each additional dollar earned to $0.78. After that, earners are faced with only slight reductions in what can be kept from each dollar earned as they pass into new tax brackets. (Of course, this tells the whole story because there are Social Security taxes, state income taxes, and in some jurisdictions, local income taxes on top of the federal income tax.)

With the proposals to place from a 70-80 percent rate on income over $10 million, the implication is that it would only affect these high-income individuals. That is, for all incomes between $500,000 and $9,999,999 a year, the rate would remain at 37 percent. As I said, this would be an extremely bizarre rate structure, and it is likely that this is not who Bernie Sanders and AOC have in mind.

More likely, this new tax rate structure, with its top rate of 70-80 percent, would look much more traditional, particularly if the point is to raise significant revenue and not just punish the very rich (or at least virtue signal that you’re punishing them). The reality is that there would be tax increases through all income levels, at least above $500,000, with many new and higher marginal tax rates. We would see a system where there are rates of, for example, 40-45 percent on incomes over $1 million and 50-55 percent on incomes over $3 million on up to 70-80 percent once one reaches $10 million.

Read more here.