I know that the more money you make the higher the percentage, but is that all there is to it? How do the rich manage to not pay as much? Or do they pay as much?
In: Economics
Think of tax brackets as envelopes you put your money into.
If the tax brackets are the following
$0-30,000 10%
$30,000-70,000 20%
70,000 – 150,000 30%
And you earn $100,000 you would put the first $30,000 you make in the 10% envelope, the next $40,000 you make (70,000-30,000) in the 20% envelope and the remaining $30,000 (100,000-70,000) in the 30% envelope.
Now the government is going to come and take 10% of the money the first envelope (30,000 * 0.1 = 3,000) 20% of the money in the second envelope (40,000 * 0.2 = 8,000) and 30% of the money in the third envelope (30,000 * 0.3 = 9,000) bringing your total tax bill to 3,000 + 8,000 + 9,000 = 20,000
So you’ll end up paying 20,000 or 20% of your 100,000 income in income tax even though you are in the 30% bracket. The bracket you are in is just the rate you pay on the top margin of your income, not your entire income. Your income is broken into pieces and each piece is taxed at a different rate.
Latest Answers