Due to popular demand, I have updated my 2010 graph on top marginal tax rates. In addition, during this year’s tax season, I will be selling copies of my Top Marginal Tax Rates graph as a tabloid size 11″x17″ poster.
FYI, your marginal tax rate is the rate you pay on the “last dollar” you earn; but when you view the taxes you paid as a percentage of your income, your effective tax rate is less than your marginal rate, especially after you take into account the deductions and exemptions, i.e. income that is not subject to any tax.
A large part of personal income is not considered “taxable” income by the IRS. In the graph personal income (as calculated by the Bureau of Economic Analysis) is around 80% of GDP. This includes all employee compensation + after tax business income + rent + interest + other income but no capital gains. However, the taxable income is around 30-40% of GDP (but it does add back capital gains as well as employee share of payroll taxes). While the taxes paid on income is only around 8% of GDP. Realized capital gains in the graph are from returns with positive net capital gains and you will notice that they peak in years 1966, 1986 as people sell off right before the capital gains tax rate increases and in 2000 when there was a bubble in the stock market.
Green line is the top marginal rate for married couples filing jointly (most years dividends were tax like ordinary income until 2003), orange is the top rate for income from capital gains. The top corporate tax rate is included for comparison. Your marginal tax rate is the rate you pay on the “last dollar” you earn; but when you view the taxes you paid as a percentage of your income, your effective tax rate is less than your marginal rate, especially after you take into account the deductions and exemptions, i.e. income that is not subject to any tax.
Over the years, changing the amount of taxes people pay was accomplished not just by changing rates but by changing the income limits of the tax brackets. Just looking at the top rates does not give the whole picture about who is paying taxes. Before the 1986 tax reform, the income tax had 15 brackets. In the 1930s, there were more than 50. The Wealth Tax Act of 1935, applied the top rate to income over $5 million and had only a single taxpayer: John D. Rockefeller, Jr. As the number of tax brackets decrease, the the top rate was applied to more people over the decades. Since 1987 the income tax brackets were combined so now more than a million people “qualify” for the top marginal rate. If you are interested here is the first 1040 form for 1913.
I wanted to try out the new Tableau Public so I took the Average Tax Rates I calculated for my Comparing Rates by Income series and created this little graph. A couple disclaimers: I am assuming standard deduction and exemptions for the children and/or spouse in each example. Also I am combining all the taxes applied to your salary including: Income, Social Security, Medicare, and Payroll (paid by your employer).
Since this is a live, interactive chart you can hide/show each line using the check boxes at the bottom of the graph.
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