The Tax Rate, or How Much Is Taxed?

Taxes are imposed as a percentage (the tax rate)  of the value being taxed (the tax base). The tax base multiplied by the tax rate determines how much is ultimately owed in taxes.  That is,

(TAX BASE) X (TAX RATE) = TAX OWED

These two things are distinct from each other and are key in understanding how people owe different taxes, even if they have the same total income.  The tax base can be wages, assets, income from assets, purchases, or any number of other taxable transactions. Tax rates vary between different types of taxable bases, so concentrating wealth into bases that have lower tax rates (or are exempt from taxation) allows people to minimize what they owe in taxes.

There are three different types of taxes: a flat rate, a progressive marginal rate, and a regressive marginal rate.

The Flat Rate

The flat rate is straightforward: everybody pays the same tax rate. The most common example of this is a sales tax. For a flat rate tax, the rate is the same, no matter how much of something is being purchased, even if the tax rate may be different depending on what is being purchased. 

If the sales tax rate on T-shirt purchases (the tax base) is 7%, then I can buy $10 T-shirts and pay $0.70 in taxes ($10 x 0.07 = $0.70), or I can buy $10,000 of T-shirts and pay $700 in taxes ($10,000 x 0.07 = $700). I am paying 7% of the price of the T-shirts in taxes, no matter how much I buy.

Marginal Tax Rates

Marginal tax rates require more math because the rate of taxation changes depending on the value of the base being taxed. The base is grouped into tax brackets, which group certain ranges of values together.  Each range of values, or tax bracket, is taxed at a different rate. With marginal tax rates, one individual’s tax base may fall into multiple tax brackets, subjecting the base to multiple tax rates. This will be discussed further below. 

Progressive Marginal Tax Rate

A progressive marginal tax rate increases as the value of the tax base increases. The income tax is a progressive marginal tax. As mentioned above, the tax rate corresponds with the tax bracket.  At lower tax brackets, in which the value of the base being taxed is lower, the tax rate is lower.  The tax rate increases as the tax brackets increase. 

See the table of 2021 Federal Income Tax Rates for single individuals:

For marginal progressive taxes, a person pays the highest rate that corresponds to the total value of the person’s tax base.  They also pay the lower tax rates, as it corresponds to that amount of their tax base. Let’s illustrate this with an income tax example.

If Bob, a single individual, makes $60,000, he will pay the following taxes, based on 2021 tax rates: 10% on his first $9,950 of income ($995), 12% on his income from $9,951 to $40,525 ($3,668.88), and 22% on his income from $40,526 to $60,000 ($4,284.28). In total, his tax bill is $8,948.16, which averages out to an effective tax rate of 14.9%.

Regressive Marginal Tax Rate

A regressive marginal tax rate works in a way similar to the progressive rate, except the tax rate decreases as the tax bracket increases. The payroll tax is an example of a regressive tax. The highest rate of payroll taxes falls on the people in lower tax brackets. Indeed, the payroll tax currently phases out after $142,800 in income.






Next: Read Who Pays the Tax?