If I were given the opportunity to teach every American one thing in five minutes, I would teach them all how marginal tax rates work. Because if people understood that — and I’m as certain of the fact that the overwhelming majority of American do NOT understand it as I am of anything — it would transform all our debates about taxation and spending.
As explained by Investopedia, a marginal tax rate “is the tax rate incurred on each additional dollar of income. The marginal tax rate for an individual will increase as income rises. This method of taxation aims to fairly tax individuals based upon their earnings, with low-income earners being taxed at a lower rate than higher income earners.”
Under the current marginal tax rates, the first $9,525 earned by a single filer is taxed at 12 percent. Income from $9,525 to $38,700 is taxed at 12 percent. Income from $38,700 to $82,500 is taxed at 22 percent. The brackets go up to the top rate of 37 percent, which for a single filer kicks in at $500,000.
Marginal tax rates are progressive — they increase with income. So under Ocasio-Cortez’s proposal, a taxpayer on the lower end of the income scale wouldn’t pay the top rate of 70 percent. That rate would be reserved for the ultra-rich — as she described it, “tippy-top” earners who make $10 million or more.
You want to “cut taxes” for “all Americans,” for example? Under the system of taxation we currently have, the only way to do that is to focus the cuts on the rates at the bottom of the ladder, because those are the only rates that all Americans pay. You want to focus them on the middle class? Fine. Then you need to focus them on the rates at the bottom and in the middle. Focusing your cuts on the top, by contrast, only helps those at the top.
People don’t understand this, and so they fall for the bait-and-switch every time. The bottom and middle see tiny reductions, while the top sees the overwhelming majority of the action. That’s been the Republican playbook my entire adult life, and it works only because Americans don’t understand the most basic facts of how this system works.
That hasn’t always been true, and there are signs that may at very long last be about to change. And in that light, whatever happens to these specific proposals matters far, far less than the ways they are changing this debate.