# How Tax Brackets Work

How Tax Brackets Work

Because people who earn more money gain more benefits from society, they also pay a larger share of their income in taxes to help pay for the things our society provides them. The way most countries accomplish this is by using tax brackets. Let’s look at a sample tax bracket for the country of Mathistan, so you can understand how this system works.

Mathistan’s government uses this system for its income tax:

First $20,000 | 0% tax |

$20,000 to $35,000 | 5% tax |

$35,000 to $55,000 | 10% tax |

$55,000 to $80,000 | 20% tax |

$80,000 to $150,000 | 25% tax |

$150,000 to $250,000 | 35% tax |

$250,000 to $1,000,000 | 50% tax |

Over $1,000,000 | 90% tax |

You might think, “Woah! That means if I made 1.1 million dollars, I’d only get to keep $110,000 of it!” But that’s not actually how it works. (If it were, nobody would want a raise that bumped them up into the next tax bracket, because they’d end up *losing* money overall!) Let’s look at some people with different incomes to see how much tax each person will pay.

Joe is poor as dirt. His $18,000 per year is only enough to put him in the lowest tax bracket. So he pays no income taxes. That one was pretty easy, wasn’t it?

Carrie earns $27,000 per year, so the first $20,000 of that money is taxed at the lowest rate, and the remaining $7,000 is taxed according to the second bracket. 5% as a decimal is 0.05, so we calculate her income taxes like this:

Carrie pays $350 per year in income tax.

Okay, what about Julio, who earns $47,000? He’s in the 3^{rd} tax bracket, so he has $20,000 in the first bracket. So far, we’ve got $27,000 of Julio’s money that’s going to be taxed. $35,000 - $20,000 = $15,000, so $15,000 of Julio’s money goes into the second bracket. There are $12,000 left that are taxed according to the third bracket. Here’s what Julio pays in income tax:

$15,000 * .05 + 12,000 * .10 = $750 + 1200

Julio pays $1950.

Stacy earns $110,000. This is getting to be a lot, so let’s bring back the tax-bracket chart and add some new columns for Stacy.

First $20,000 | 0% tax | $20,000 of Stacy’s money | No tax |

$20,000 to $35,000 | 5% tax | $15,000 '' '' '' | 15,000 * 0.05 |

$35,000 to $55,000 | 10% tax | $20,000 '' '' '' | 20,000 * 0.10 |

$55,000 to $80,000 | 20% tax | $25,000 '' '' '' | 25,000 * 0.20 |

$80,000 to $150,000 | 25% tax | $30,000 '' '' '' | 30,000 * 0.25 |

$150,000 to $250,000 | 35% tax | ||

$250,000 to $1,000,000 | 50% tax | ||

Over $1,000,000 | 90% tax |

Now we can easily calculate how much tax Stacy pays.

15,000 * .05 + 20,000 * .10 + 25,000 * .20 + 30,000 * .25 = 750 + 2000 + 5000 + 7500

Stacy pays a grand total of $15,250 in income tax.

Notice that in this entire example, NOBODY is giving away 25% of ALL THEIR MONEY. Marginal taxes do not work that way. Tell your friends.