tax brackets

consider the following table of tax rates.

┌──────────────┬────────────┬────────────────┐
│ Gross Income │ Net Income │ Effective Rate │
├──────────────┼────────────┼────────────────┤
│ 12,000$      │ 17,200$    │ -43.33%        │
│ 20,000$      │ 22,000$    │ -10.00%        │
│ 25,000$      │ 25,000$    │ 0%             │
│ 40,000$      │ 34,000$    │ 15.00%         │
│ 80,000$      │ 58,000$    │ 27.50%         │
│ 160,000$     │ 106,000$   │ 33.75%         │
│ 320,000$     │ 202,000$   │ 36.88%         │
│ 640,000$     │ 394,000$   │ 38.44%         │
│ 1,000,000$   │ 610,000$   │ 39.00%         │
└──────────────┴────────────┴────────────────┘

for instance, a person whose gross income is 40,000$ pays 15% of their income in taxes. whereas someone who earns a million pays 39%. this sure does look progressive, doesn’t it?

in fact, people grossing below 25k actually have a negative tax bill — they receive a refund.

surprise

but what if i told you this table represented a flat tax rate of 40% for all individuals, combined with a 10,000$ refundable tax credit. (“refundable” means that you get the difference back as a refund if it’s greater than your amount owed in taxes.)

you can easily verify this. for instance, 40% of 80k is 32,000$. now subtract that tax credit for a total of 22,000$. now subtract 22,000$ from the gross of 80,000$ and you get 58,000$.

best of both worlds

what this example illustrates is the distinction between a true flat tax and a marginal flat tax and a marginally flat tax. our tax system described above isn’t truly flat, because the effective rates are indeed progressive. but it is marginally flat, because each additional dollars of earnings pays a flat rate. this structure gives us the benefits of flat taxes, such as administrative simplicity and minimal deadweight loss, while also retaining the social aim of reducing inequality.