(Photo by Justin Sullivan/Getty Images)
(Photo by Justin Sullivan/Getty Images)

Let’s tax the rich at 90% and make them pay their “fair share.” To someone uneducated about how taxes work this sound like a great idea until you run the numbers.

What Happened When The Rich Paid 90%?

What most people fail to realize is the difference between “earned income” and “taxable income.”

Back in 1944-45 the top tax rate was 94%. That seems very fair. The rich pay .94¢ of every dollar in taxes. Now we’re getting somewhere.

Except that never happened.

No one paid that rate because of the difference between taxable income and earned income. There were so many deductions during that era by the time they were all taken rich and poor paid a tax rate somewhere between 15-25 percent no matter how much they made.

In today’s dollars a 94 percent top rate would start at a little over $2.5 million.

How Tax Rates Work

The IRS uses tax brackets to establish the amount of taxes that are imposed on taxable, not necessarily, earned income.

Here are the brackets for 2015:

$ 0

$ 9,225


























As you can see by the table above if your income was between zero and $9,225 you would pay a 10 percent tax or $925.00.

What if you made $37,450 how much would you owe?

Would you pay 15% on the entire amount? NO, you wouldn't.

You pay 10 percent, or $925, for taxable income from 0-$9,225. You only pay 15% on taxable income between $9,225 and $37,450.

Fifteen percent of the entire $37,450 would be $5,617.50.

But the actual taxes owed would be $925 on the first 10 percent of income plus 15 percent on the difference between $9,225 and $37,450 ($28,225 X 15% =$4,233.75) or a total tax bill of $5,158.75.

That works out to a difference of $458.75 less than paying the full 15 percent because it’s a progressive tax code. The higher you go in the brackets the higher percentage of tax you pay but only on the increase in taxable income not the total amount.

If you made $413,200 you would not pay 35 percent or $144,620.

You would pay $925 + $4,233.75+$13,325.00+$27,594.99+$73,326.00+$1,700.00 = $121,104.74 or about a 29 percent total tax rate — not 35 percent.

If you were a millionaire you would only pay 39.6 percent on the difference between your $1 million and $413,200. Your total tax rate would be about 34 percent — not 39.6 percent.

Pretty simple huh?

Some Final Thoughts

So as you can see taxing the rich would not add that much to our tax revenues because of the amount of allowed deductions that makes the taxable income lower than the earned income. And it's fair for both millionaires and us.

Plus many millionaires invest their money and are taxed on dividends that are taxed at between 15-20% depending on income.

Since 1945 total tax revenues as a percentage of GDP (Gross Domestic Product) have barely moved. They have consistently stayed between 15 and 20 percent regardless of tax rates or party in office.

So taxing the rich, while a feel good idea, would hardly move the needle of tax revenues.

Perhaps encouraging saving and investing your money might be a better deal for the tax coffers.

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