Today and tomorrow one of the main stories will be tax day and how much is collected and how much people pay. One thing that won't be included will be any real discussion of the effective tax rate, which is one's real tax rate.
Oh sure, there will be lots of discussion of marginal tax rates (basically the rate at which one's final dollar earned is taxed) but not much about effective tax rate, which is what you get if you divide one's total income by tax paid. For example if your total income is $80,000 and you end up paying $8,000 in taxes that is an effective (or real) tax of 10%.
What many people don't understand is that different parts of income are taxed at different levels. People understand that there are different tax rates on different income levels (10%, 15%, 25%, 28%, 33%, 35%), but conservatives have deceived the public into thinking that if they earn over a certain amount ALL of their income will be taxed at the higher level.
In reality, different parts of a person's income are taxed at the different levels.For example, for singles, currently taxable income (AGI minus deductions) up to $7,000 is taxed at 10%, income from $7,001 to $28,400 is taxed at 15%, and so forth. For a complete listing of rates see Yahoo's tax center.
So a single person (with a simple return) making $38,200 has taxable income of $30,200 and pays $4,360 in taxes ($700 (10%) on income up to $7,000, $3,210 (15%) on income between $7,000 and $28,400; and $450 (25%) on the income over $28,400). While the marginal rate is 25% (tax on last dollar earned) the effective (or real) tax rate ($4,360/$38,000) is 11.47%.
A married couple (with no kids) with income of $38,000 would pay $2,660 as the 10% rate extends up to $20,000, instead of $14,000, which results in an effective tax rate of 7%. A married couple with two children making $100,000 would pay around $11,100, for an effective tax rate of 11.2%.
To see taxes on different levels of income, check out this tax site. After looking at the site you will understand why you will hear a lot about 35% marginal tax rates but not much about 11.47 effective tax rates.
