Warren Buffett is one of the few people who complains that his
taxes are too low. Most Americans think they pay too much, and even
Oprah has said that she hates writing checks to the IRS. But in
reality, your tax rate is probably much lower than you realize.
Marginal vs. effective
Most of us are familiar with tax brackets. If you're single and
have taxable income of $100,000 in 2010, you're in the 28% tax
bracket. You might think that your
taxable income gets whacked at that 28% rate -- but you'd be wrong.
tax rate is 28%, meaning that your
dollar of income would be taxed at 28%. But all the previous tax
brackets also apply to you.
For example, out of your $100,000 taxable income, your first
$8,375 would be taxed at just 10%, costing you $838. Your next
$25,625 (which gets you to $34,000 in income) is taxed at 15%,
costing you $3,844 on that portion. Only $48,400 (the sum from
$34,000 to $82,400) is taxed at 25%, costing $12,100 on that
amount. And only the remaining
$17,600 gets taxed at the 28% rate (cost: $4,928). Add up those
taxes, and you end up paying $21,710 -- an
tax rate of 21.7%, considerably lower than your 28% marginal
Furthermore, by the time you arrive at the income on which Uncle
Sam levies taxes, you've most likely taken many deductions and
credits. That makes your effective tax rate on your original total
income significantly lower than 21%.
Compared to many developed nations, America has vastly lower income
For 2009, Sweden tops the list of the world's highest marginal
tax rates at 56.7%, with Japan just behind at 50%. China and
Germany charge 45%, while France and the U.K. come in at 40%. Those
are considerably higher than our 35% maximum marginal rate (shared
with South Korea). Big countries with lower maximums include India
(30%), Mexico (28%), and Brazil (27.5%).
For many of the above countries, the top rates kicked in at
relatively low levels, too. Top brackets hit at less than $75,000
in income for the U.K., Sweden, and South Korea, and less than
$200,000 for Japan and China. In India, the highest income bracket
starts at just more than $10,000! Compare those thresholds with our
own $372,950. It's true that many high-tax nations offer their
taxpayers more services and benefits (such as universal health
care) than we do, but that does come at a cost.
It's never easy to take out your checkbook and send Uncle Sam
some cash. This April, just remember that you could be paying a lot
more than you are.
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