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How Tax Brackets Work -- $250,001 Will Pay Five Cents More Tax

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This discussion of whether to get rid of the Bush tax cuts for the rich has been a learning experience. I have been listening on the radio and reading the comments at blogs. The main thing I am concluding is that people just do not understand how tax brackets work.

When people talk about raising taxes on people "who make more than" a certain income they really mean that they are going to raise it ONLY on the income that comes in after a certain income is received, not on the person't entire income.

Here is what I mean. Suppose they say they are going to raise taxes on incomes above $250K. People seem to think that this means if you earn $250K plus a dollar, that you owe an additional tax on the entire $250K. This is not correct. I actually hear stories about people who give away money, and do other things to avoid going "into a higher bracket" because they think they have to pay additional taxes on their entire earnings.

Here is how it really works. What happens is that the first $250K is taxed just like it has been, but anything that is made over $250K -- and only the amount over $250K -- is then taxed at the higher rate. The tax on the amount below $250K is not changed.

Example: Suppose the tax increase is 5% on income over $250K. This means that a person who reports income of $250K plus one dollar will be taxed an additional 5 cents. FIVE CENTS!

Yes, that's right, if it is 5% they are talking about then it means a 5 cent tax increase on people who make $250,001.

Let me repeat that. If you make $250,001, and they raise taxes 5% on people who make over $250K, then you will have to pay 5 cents more. Five cents. F.I.V.E. C.E.N.T.S. That is what people are so upset about. 5 cents.

If it is 5% a person making $260K might pay an additional $500. That's right, the proposed tax increase is approx. $42 a month on people making $260K, about $21,600 a month. Forty-four dollars out of twenty-one thousand. THIS is what all the right-wingers are screaming about. THIS is what all the Ayn Rand cultists are threatening to stop working over. THAT is how tax brackets work.

This post originally appeared at Campaign for America's Future (CAF) at their Blog for OurFuture. I am a Fellow with CAF.

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