Income Tax Accounting, Fall 2024, chapter 1, LO 1, proportional tax rate structure

so tax rate structures there are three different types of tax rate structures Progressive proportional and regressive um we're going to start talking about the progressive tax rate structure and what defines the progressive tax rate structure is that as income or the base we'll talk about the tax base and the tax base is whatever it is that's being taxed in this case we're talking about income right tax base could be value of property it could be the value of a sale when you pay sales tax your the tax base there is the cost of whatever it is that you purchased in this case our tax base is the income so as income increases the rate increases so this is what we have in the US and these were our this is an example for married taxpayers and it makes a difference whether they're married or not and you'll we'll talk more about that as we go along for married taxpayers these are the income ranges that correspond with the tax rate that they're paying so you'll see here up to so from 0 to 22,000 we call these brackets these are tax brackets from0 to $22,000 of income in 2023 the tax rate was 10% that's pretty easy to calculate right so they have income of $20,000 we're talking about $2,000 of income tax and this is taxable income as we increase our income though the rate is also going up so if we have $50,000 of income tax will income that means that the amount between 22,000 and 50,000 is going to be taxed at 12% but our first 22,000 is going to be taxed at 10% so you still get even if your income is way up here on these other on these lower brackets of income you're still getting the benefit of these lower tax rates so your marginal tax rate is just the tax rate within which the last dollar of income Falls so if my income is $50,000 that falls between 22 and the 89450 my marginal rate is 12% right as and as and we're going to talk that's remember I I I mentioned marginal versus average tax rate we're going to look at what that CC is um here in a minute but you can see so as the income goes up the rate also goes up that's Progressive Iowa currently has a progressive tax structure but we are I think it's starting next year I don't know if it's 2025 or 2026 when I said that in Peril I sort a second guessed myself but we are we currently have a progressive tax rate structure but we are moving to a a um proportion tax rate structure which is a flat tax okay so let's look at an example here we got Mary and George they have taxable income of $375,000 good for them that means that their last dollar that they earn of that 300 there's 375,000 375,000 is going to be taxed at the 32% tax rate but not all of their income is taxed at 32% right only the amount that exceeds 36400 is going to be taxed at 32% the amount of their income that's taxed between 19751 and 36400 is taxed of 24% and so on and so forth oh hi George oh my gosh Kell sorry GL I was waiting I was waiting for you to recognize we went to college together bye um I knew he worked here it's been a long time since I've seen him though um okay so and this is then this is the calculation of how that would work so you would calculate each of these brackets separately so their first $22,000 tax at 10% will result in $2,200 of tax next bracket we're going to look what whatever that ranges so you're going to have to take the top number here minus what was already in the other bracket and the difference is the amount that's taxed at the new rate okay between 190 and 750 and the 89450 it's taxed at 22% so that income range multiplied by the 22% now they're at $ 22,28 same thing for the 24% range and then the amount that exceeds that bottom number in the 32% range minus or the 375 minus that bottom number is tax at 32% so for their total and then you would add it all up their total tax liability 77,6 64 now if we were to how much is 375 * 32% somebody can give that to me because I don't have my calculator with me so they income of 375 138 750 138 750 but their liability is 77,6 64 so they are not paying 32% in tax right that is their marginal tax bracket they're paying 77664 because we're using their because that's what they get to with their marginal within their marginal bracket if this was all at 32% they'd be paying a lot more okay so that is a feature of the agressive tax system is the higher the rate I'm sorry the higher the base in this case the income the higher the tax rate but you still get the benefit of those lower rates on the lower amounts of your income questions no okay all right so this is kind of an example of the fact that their their total tax liability is not 32% what percent is it this would be how we get to their average tax rate we're going to take we would calculate first the total tax liability and then divide that by the amount of their total amount of income so what is that so we're talking 77664 don't look at your book divided by 375 sorry sorry for the squeak somebody with a calculator do that for me what's the math on that I'm sorry 77 664 / 37 20.7 they average tax rate is 20.7% so big difference between what a marginal tax rate is and what an average tax rate is the only time that an a marginal tax rate is going to equal an average tax rate is when you're in the very first first bracket when you get beyond the first bracket your marginal tax rate is always going to be higher than your average tax rate does that make sense math wise so that's Progressive that's a feature of the progressive tax system and I think they did that yeah 20.7 one is their average tax rate uh more statistics about how much um the number of returns in each this was for 2021 number of returns um versus total tax liability let's see so adjusted gross income under 15,000 there were 3,714 th000 returns average tax rate was 99.94% 15 to 30 average tax rate was 8.26% we're talking average not marginal 30 to 50 8.85% be interesting to dig into why that went down I bet that has to do with earned income credit um 50 to 100 11.3 was her average tax rate 100 to 200 14.37 and then you get 200,000 or more your average tax rate was 25 over 25 % all right