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  • Sanders and Tax Brackets

    January 20th, 2016
    politics, taxes
    Our tax brackets are kind of complicated, so I was surprised to see Bernie Sanders' health care proposal saying simply:
    Under this plan the marginal income tax rate would be:
    • 37 percent on income between $250,000 and $500,000.
    • 43 percent on income between $500,000 and $2 million.
    • 48 percent on income between $2 million and $10 million.
    • 52 percent on income above $10 million.
    To see why this is weird, let's look at our current tax brackets. Here's the amount of money you have to earn [1] before the government will start taxing you at the current highest rate, 39.6%:
    Single $413,200
    Married filing jointly $464,850
    Married filing separately $232,425
    One of these sticks out: the limit for married people filing separately is far lower than the other three. In fact, it's exactly half the threshold for married people filing jointly. What are these categories, though? In the US married people typically file one joint tax return. If you want you're allowed to file separately, one tax return each. To avoid rich people changing their filing to pay taxes at a lower rate, we shift the tax brackets higher for people filing separately.

    By getting rid of this, Sanders does a few things:

    • Taxes on married individuals who earn $232k-$800k and would be filing separately regardless are lower under his plan than they are now.
    • Married people with joint incomes over $250k do better to file separately if both spouses have income.
    • Married people can take advantage of this, filing separately instead of jointly, and potentially pay less tax than they do today. For equal income couples, this is anyone in the range $464k-$1.6M.
    • Taxes are simpler.

    I like simplicitly, but I don't think getting rid of tax bracket categories once you pass $250k is worth it. Too many people's taxes would effectively be lowered under this plan, once they responded by switching to separate filing.

    (If you want simplicitly I'd much rather have a tax setup in the form of "give everyone $X and then taxeveryone at Y%".)

    Update 2016-01-21: David points out that maybe Sanders isn't meaning to change things here and I misunderstood their use of "household". To be sure we would need to ask the campaign, but the idea is that since the separate limits are generally exactly half the joint limits that Sanders may have thought this was too much detail to go into and plans to keep things as they are. In which case this post is a long argument for "let's not change something that no one intends to change".


    [1] I've left out the "head of household" category which is not relevant here.

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