Tax Bracket

What is a Tax Bracket?

A tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat.

Federal Income Tax Brackets

As of 2020, the federal individual income tax in the U.S. has rates ranging from 10 percent to 37 percent. As you can see in the table below, tax rates increase with income levels, resulting in what’s called a “progressive” income tax system. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden.

Table 1. 2020 Tax Brackets and Rates
Rate For Single Individuals, Taxable Income Over For Married Individuals Filing Joint Returns, Taxable Income Over For Heads of Households, Taxable Income Over
10% $0 $0 $0
12% $9,875 $19,750 $14,100
22% $40,125 $80,250 $53,700
24% $85,525 $171,050 $85,500
32% $163,300 $326,600 $163,300
35% $207,350 $414,700 $207,350
37% $518,400 $622,050 $518,400

Source: Internal Revenue Service

State Tax Individual Income Tax Brackets

State individual income taxes range from single-rate flat taxes to Hawaii’s 12-bracket system. Many states have several narrow tax brackets close together at the low end of the income scale, including a zero bracket created by standard deductions and exemptions. These can yield a tax system that is functionally flat, since most taxable income is exposed to the top marginal rate. On the other hand, some states impose progressive rate structures that can cause individuals and noncorporate businesses to alter their income-earning and tax-planning behavior.

Connecticut and New York apply the rate of the top income tax bracket to previous taxable income after the taxpayer crosses the top bracket threshold, which is known as income recapture, while Arkansas imposes different tax tables depending on the filer’s level of income. Income recapture provisions are poor policy, because they result in dramatically high marginal tax rates at the point of their kick-in, and they are nontransparent in that they raise tax burdens substantially without being reflected in the statutory rate.

Corporate Income Taxation

Traditional arguments for graduated-rate taxation have little bearing on corporate taxation, since the size of a company is not reflective of the overall income of its owners or investors. In contrast to the individual income tax, there is no meaningful “ability to pay” concept in corporate taxation, and single-rate corporate income tax systems are most consistent with the sound tax principles of simplicity and neutrality.

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