Why are the tax brackets non sequential

[Mrs. Dinero]

Where is the logic? Why increase tax brackets in non sequential order? Bell curve?

[haapai]

What are you looking at?  Is it possible that it is about marginal tax rates? 

[Mrs. Dinero]

Yes marginal tax rates. There are seven federal tax brackets for the 2021 tax year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your bracket depends on your taxable income and filing status.

Why the jump from 12 to 22% and from 24 to 32%?

[billisonboard]

Because the taxable income brackets are non-sequential.

[tskeeter]

Nov 16, 2021 22:51:32 GMT -5 Mrs. Dinero said:

Yes marginal tax rates. There are seven federal tax brackets for the 2021 tax year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your bracket depends on your taxable income and filing status.

Why the jump from 12 to 22% and from 24 to 32%?

I think that most people, including the people in Congress who created this structure, would be hard pressed to explain the large and irregular increases between certain tax rates.  That said, you can’t just look at tax rates.  You also have to look at the range of incomes in each bracket.  For a single filer, the 10% bracket covers incomes across a range of about $10K.  The 35% bracket applies to incomes spread across a range of more than $300K. 

Although I held a CPA certificate for more than 30 years, I’m not aware of any formula behind tax rates and tax brackets.  It’s just the accumulation of what Congress has done over an extended period of time. Simply, it is what it is and nobody can really explain exactly how or why it got to be the way it is.

[thyme4change]

Negotiations don't always end in logic. And congress never, ever ends in logic.

[minnesotapaintlady]

Nov 17, 2021 0:26:42 GMT -5 tskeeter said:

Nov 16, 2021 22:51:32 GMT -5 Mrs. Dinero said:

Yes marginal tax rates. There are seven federal tax brackets for the 2021 tax year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your bracket depends on your taxable income and filing status.

Why the jump from 12 to 22% and from 24 to 32%?

I think that most people, including the people in Congress who created this structure, would be hard pressed to explain the large and irregular increases between certain tax rates.  That said, you can’t just look at tax rates.  You also have to look at the range of incomes in each bracket.  For a single filer, the 10% bracket covers incomes across a range of about $10K.  The 35% bracket applies to incomes spread across a range of more than $300K. 

Although I held a CPA certificate for more than 30 years, I’m not aware of any formula behind tax rates and tax brackets.  It’s just the accumulation of what Congress has done over an extended period of time. Simply, it is what it is and nobody can really explain exactly how or why it got to be the way it is.

I think that explains the bulk of it.  If you look back through the tax rates in history and the consolidation of brackets and tax cuts we end up where we are.  Back in the early 1900's there were over 60 brackets at 1% increments. 

taxfoundation.org/historical-income-tax-rates-brackets/

[TheOtherMe]

It makes no sense because Congress writes the tax laws.  Never has and never will.

It does have to do with lobbying, especially on the corporate side.

The first tax return was very simple.  All on one page.  The year was 1913.  For a period of time, taxes were unconstitutional.   Then the 16th Amendment to the constitution came to be and here we are.


www.archives.gov/global-pages/larger-image.html?i=/historical-docs/doc-content/images/irs-form-1040-1913-l.jpg&c=/historical-docs/doc-content/images/irs-form-1040-1913.caption.html 

[Lizard Queen]

Nov 17, 2021 9:45:28 GMT -5 thyme4change said:

Negotiations don't always end in logic. And congress never, ever ends in logic.

Exactly. Political compromise doesn't find the best way, just the expedient for the time-being way. See: 3/5 compromise.

[Tiny]

Where is the logic? Why increase tax brackets in non sequential order?

As have been noted it's Congress makes the changes.

And it DOES make sense... Congress isn't able to make dramatic changes - because some of their voters (ie some Americans) take the brunt of the "bad" or "con" parts of the changes. And if the people effected are wealthy - and vote -  it might sway the decisions Congress makes. 

I'm guessing that when tax brackets have changed in the past the thought process/reasoning was to CHANGE the whatever being changed in a way that could be a "Selling Point" or a "This is what we want to focus on because it obscures the not so good parts of the changes" OR the change helped some people but didn't effect dramatically a large number of people.   I'm guessing those situations are few and far between. 

Let's not forget that Congress ALSO determines what "income" gets included as taxable income and is effected by those brackets. Tax brackets are very visible - atleast once a year (at tax time) to most Americans. Changing the tax brackets MIGHT be very difficult as people complain about the changes. Congress instead can create rules for reducing one's taxable income - thus lowering one's taxes without changing the Tax Brackets. You know that "personal deduction" thing and how the AMOUNTS of income for the tax brackets vary based on Single, Married Filing Joint, and Head of Household.   (and all those tax advantaged retirement accounts and healthcare things like HDHP + HSA and FSAs and Dependant care FSAs -  getting pretax money is good!  Especially when it's money that might have been taxed the next bracket up OR is in one of the higher tax brackets.    

I'm guessing it's easier (and less obvious to everyone) to change how to "lower one's taxable" income - than it is to change a tax bracket %.  
(FWIW:  my goofy relative was still cooing about his mortgage deduction on his taxes and how wonderful a deduction it was - when it wasn't doing anything for him.  It didn't change his taxes AT ALL  - even though he keyed the info into Turbo Tax (which made him feel like it did something).   -   as long as people aren't really clear on how what Congress does changes their tax burden  - it's all "magic" and  well the "headlines said X is good so I must be benefiting from it!". 

I'm guessing even 30 years ago - the majority of Americans did NOT have W2 income that was taxed at 24% bracket much less the 22%.
Today, I think there more Americans that have income where some of it (or a lot of it) IS hitting in the 24% and higher brackets and they don't have a good way to lower their taxable income.

[minnesotapaintlady]

Nov 17, 2021 13:00:14 GMT -5 Tiny said:

I'm guessing even 30 years ago - the majority of Americans did NOT have W2 income that was taxed at 24% bracket much less the 22%.
Today, I think there more Americans that have income where some of it (or a lot of it) IS hitting in the 24% and higher brackets and they don't have a good way to lower their taxable income.

I was perusing the old tables I linked.  In 1973 I would have been in the 32% tax bracket with just 10K of taxable income!  Over 100K was the SEVENTY percent tax bracket for singles.

[Tiny]

Nov 17, 2021 13:06:11 GMT -5 minnesotapaintlady said:

Nov 17, 2021 13:00:14 GMT -5 Tiny said:

I'm guessing even 30 years ago - the majority of Americans did NOT have W2 income that was taxed at 24% bracket much less the 22%.
Today, I think there more Americans that have income where some of it (or a lot of it) IS hitting in the 24% and higher brackets and they don't have a good way to lower their taxable income.

I was perusing the old tables I linked.  In 1973 I would have been in the 32% tax bracket with just 10K of taxable income!  Over 100K was the SEVENTY percent tax bracket for singles.

But wouldn't taxable income of 10K in 1973 have pushed you to the top of the middle class or over?         

Minimum wage was $1.60...    $1.60 * 2080 = $3,328.00  (52 work weeks of 40 hours with NO vacation or sickdays)     

[gs11rmb]

Nov 17, 2021 13:06:11 GMT -5 minnesotapaintlady said:

Nov 17, 2021 13:00:14 GMT -5 Tiny said:

I'm guessing even 30 years ago - the majority of Americans did NOT have W2 income that was taxed at 24% bracket much less the 22%.
Today, I think there more Americans that have income where some of it (or a lot of it) IS hitting in the 24% and higher brackets and they don't have a good way to lower their taxable income.

I was perusing the old tables I linked.  In 1973 I would have been in the 32% tax bracket with just 10K of taxable income!  Over 100K was the SEVENTY percent tax bracket for singles.

According to an inflation calculator, $10,000 in 1973 = $65,000 in 2021.  

[Tiny]

I'm "sheltering" a lot of income from the 24% income tax bracket -- all of the money I contribute to my 401K, HSA, FSA is all income that would have been taxed at 24% in 2021.

[minnesotapaintlady]

Nov 17, 2021 13:18:44 GMT -5 Tiny said:

Nov 17, 2021 13:06:11 GMT -5 minnesotapaintlady said:

I was perusing the old tables I linked.  In 1973 I would have been in the 32% tax bracket with just 10K of taxable income!  Over 100K was the SEVENTY percent tax bracket for singles.

But wouldn't taxable income of 10K in 1973 have pushed you to the top of the middle class or over?         

Minimum wage was $1.60...    $1.60 * 2080 = $3,328.00  (52 work weeks of 40 hours with NO vacation or sickdays)     

But, I don't make minimum wage now, about triple it...so about equivalent to 10K in 1973.  The standard deduction was $1300 back then, so $8700 taxable.  A little better, but still the 28% tax bracket.

[Tiny]

Once you go back far enough - it starts to sound like "but a loaf of bread was 5 cents. and a gallon of gas was 3 cents."

There is no cent sign on the keyboard! I never noticed that before. Ugh it's a multi key thing: ALT 0162 ¢ ¢

[Tiny]

Nov 17, 2021 13:27:11 GMT -5 minnesotapaintlady said:

Nov 17, 2021 13:18:44 GMT -5 Tiny said:

But wouldn't taxable income of 10K in 1973 have pushed you to the top of the middle class or over?         

Minimum wage was $1.60...    $1.60 * 2080 = $3,328.00  (52 work weeks of 40 hours with NO vacation or sickdays)     

But, I don't make minimum wage now, about triple it...so about equivalent to 10K in 1973.  The standard deduction was $1300 back then, so $8700 taxable.  A little better, but still the 28% tax bracket.

     

I'm not sure what that all means.   Would you have been poorer back in 1973 with 10K in income or richer? 

[minnesotapaintlady]

Nov 17, 2021 13:30:47 GMT -5 Tiny said:

Nov 17, 2021 13:27:11 GMT -5 minnesotapaintlady said:

But, I don't make minimum wage now, about triple it...so about equivalent to 10K in 1973.  The standard deduction was $1300 back then, so $8700 taxable.  A little better, but still the 28% tax bracket.

     

I'm not sure what that all means.   Would you have been poorer back in 1973 with 10K in income or richer? 

I'm saying the tax brackets were a lot higher.  I mean, they go up to 70%!  What's the highest now 37%?

I do put a lot into tax-preferred to stay in the 10% bracket, but even if I did none, I'd still be in the 12%.  Back then with an equivalent income I'd be in the 28% bracket...maybe the 25% if I put a lot into retirement.  The lowest bracket they had was 14%.

[tallguy]

And during WWII we had a top rate of 94%.  FDR proposed a top rate of 100% but didn't get it.

[TheOtherMe]

Nov 17, 2021 13:06:11 GMT -5 minnesotapaintlady said:

Nov 17, 2021 13:00:14 GMT -5 Tiny said:

I'm guessing even 30 years ago - the majority of Americans did NOT have W2 income that was taxed at 24% bracket much less the 22%.
Today, I think there more Americans that have income where some of it (or a lot of it) IS hitting in the 24% and higher brackets and they don't have a good way to lower their taxable income.

I was perusing the old tables I linked.  In 1973 I would have been in the 32% tax bracket with just 10K of taxable income!  Over 100K was the SEVENTY percent tax bracket for singles.

You can thank Ron Reagan for getting the tax brackets lowered.

I was auditing tax returns back when it changed.  You should have seen how corporations would try to get out of calling what they paid executives compensation.  Those were thee most fun cases ever.  

[tskeeter]

Nov 17, 2021 13:18:44 GMT -5 Tiny said:

Nov 17, 2021 13:06:11 GMT -5 minnesotapaintlady said:

I was perusing the old tables I linked.  In 1973 I would have been in the 32% tax bracket with just 10K of taxable income!  Over 100K was the SEVENTY percent tax bracket for singles.

But wouldn't taxable income of 10K in 1973 have pushed you to the top of the middle class or over?         

Minimum wage was $1.60...    $1.60 * 2080 = $3,328.00  (52 work weeks of 40 hours with NO vacation or sickdays)     

And your $3,328.00 would pay for a brand new Ford Mustang.  Which was one of the most popular cars in the country. According to US News, minimum wage earnings in 2021 ($15,080) will get you a choice of just three cars.  With very limited, if any, options.

[tskeeter]

Nov 17, 2021 16:14:15 GMT -5 tallguy said:

And during WWII we had a top rate of 94%.  FDR proposed a top rate of 100% but didn't get it.

Also interesting that at the same time, the bottom tax rate was 20%.  And that was before we had earned income tax credits, dependent tax credits, child care credits, education credits, and the like that resulted in 61% of “taxpayers” paying no federal income tax in 2020 (Uban-Brookings Tax Policy Center).

[billisonboard]

Nov 17, 2021 10:13:23 GMT -5 Lizard Queen said:

Nov 17, 2021 9:45:28 GMT -5 thyme4change said:

Negotiations don't always end in logic. And congress never, ever ends in logic.

Exactly. Political compromise doesn't find the best way, just the expedient for the time-being way. See: 3/5 compromise.

Satisficing.