The existence of taxes is disliked, to say the least, by many people. But the truth is that taxes are an important part of modern society. They enable countries to build roads, found schools, hospitals, police stations, and other public good services. To ease this burden, and to try to fair to everyone, the law on tax brackets was created.
What are tax brackets?
Speaking in simple terms, tax brackets divides people into groups based on their income. Rather than have everyone pay the same percentage of their income as taxes, your percentage changes based on your group. The most widespread type of tax brackets is progressive tax brackets. This means that bigger your income is the bigger percentage of it will have to be paid as taxes. There is also much rarer regressive tax system, where your percentage goes down as your income goes up. Since the progressive type is used far more than its regressive counter type, we will only focus on the progressive tax brackets.
Advantages of tax brackets
Why even use tax brackets, some may ask. There is a very simple answer to why we use this complicated system. Taxes were always part of our society. But at first, there were fixed taxes. No percentages. This was very oppressive for the working class where they had to pay a large portion of their income in taxes.
Thus, percentile taxes were created. Everyone paid the same percentage of their income so this system was better than previous one. What current system tries to achieve, with tax brackets, is to help even more to those who have lower income. By increasing the percentage the upper class has to pay, you lower the amount that those with lesser income have to pay.
Different kinds of tax brackets
There are different tax brackets in different countries but they generally have four to five groups. In the first one are people with the lowest income, and they usually don’t have to pay anything, though this can vary from country to country. The rest are divided into several groups each one with increasing percentage. The top limit usually does not exceed 45 percent.
The United States, like many other countries, uses the progressive system. This means that you are taxed differently depending on your income. To put it in simple words, the bigger your income is, the bigger percentage of it you’ll have to pay in taxes.
It is very likely that, throughout the year, your income may vary, and you will pay your taxes at a different rate. However, this will not be your effective tax rate. Your effective tax rate will be calculated depending on al of yours tax rate. Let us look at this simple example.
You have two different incomes with two different tax rates. One income is at 15 percent and the other one is at 25 percent. This means that your overall effective tax rate is 20 percent and for every 10 dollars you earn you will have to pay 2 dollars as taxes.