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 entire taxable income gets whacked at that 28% rate -- but you'd be wrong. Your marginal tax rate is 28%, meaning that your next 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 effective tax rate of 21.7%, considerably lower than your 28% marginal bracket.
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 tax rates.
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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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.