On Marginal and Effective Tax Rates

By Sam Brunson

A friend sent me a cartoon that’s been going around his Facebook feed. The cartoon’s message amounts, roughly, to: undocumented immigrants are far better-off than legal residents because taxes.

The various assertions the cartoon makes are an amazing collection of racist and wrong. In fact, there’s too much racist, and too much wrong, to address. But it’s worth pointing out that, although the cartoon uses numbers, its numbers are wildly, wildly wrong.

If you want to hate-read the whole thing, you can see it here, but for my purposes, we’re going to look at these two panels:

Okay, I said I was only going to look at numbers, but it’s worth noting the racism that underlies the whole thing: our harmed legal resident is a white guy, while our rapacious illegal interloper is a person of color. (Side note: why am I even bothering analyzing something so transparently pointless and wrong? If nothing else, to provide numerical ammo when your racist uncle—or aunt, for that matter—brings it up at dinner.)

So why don’t the numbers work? Because John’s not paying taxes at anywhere near a 30% effective or marginal rate. (Marginal rate is the rate of tax you pay on your last dollar of income. Effective rate is the percentage of your income you pay in taxes.)

How much does John pay in taxes? Let’s assume he doesn’t itemize and just has his wage income. So we start at \$52,000. According to the cartoon, he’s married with two kids, and I’ll assume he files a joint return. That means he gets a standard deduction—in 2017, that’s \$12,700—and he gets four personal exemptions, at \$4,050 a pop.

Subtract that from his income, and he has taxable income of \$23,100. That puts him in the 15-percent marginal rate. Of course, that doesn’t mean he pays taxes at a 15% rate. He pays 10% on his first \$18,650, and 15% on the rest. Ultimately, he owes federal income taxes of \$2,532.50.

He also owes payroll taxes. (Note that I’m going to grossly simplify here: payroll taxes today mean that he gets social security payments later. But let’s ignore that.) As long as he’s an employee (and the cartoon talks about withholding on his wages, so he’s an employee), he pays 6.2% of his wages, for \$3,224.

After taxes, then, John has \$46,243.50 left. (I’m leaving out state income taxes, mostly because I don’t want to figure out Arizona tax law. But he’s not going to owe \$10,000 in Arizona—at most he’ll owe 2.59% on a portion of his income.)

What about Juan? According to the cartoon, he doesn’t pay federal taxes.[fn1] Broadly speaking, that’s probably not true.[fn2] But let’s pretend it is. How much would Juan owe in federal taxes? We have the same standard deduction and personal exemptions. On \$31,200 of income, Juan would have \$2,300 of taxable income, and would owe federal income taxes of \$230. He would also owe \$1,934.40 in payroll taxes.

Which is to say, even if Juan were not paying federal taxes (and note that, if he’s not paying his share of payroll taxes, that’s because his employer has chosen to break the law and not withhold), that’s a loss of just over \$2,000.

Ignoring for a moment the racism, and pretending that the cartoonist is sincere, the cartoonist’s errors underscore two issues to me. First, people have no idea the difference between effective and marginal rates, and will use whichever is most convenient for their point.

And second, people vastly overestimate the amount they pay in taxes.

[fn1] FWIW, later the cartoon complains about various state benefits received by undocumented immigrants; those immigrants, though, do pay sales and property taxes, which largely fund the services the cartoon complains about.

[fn2] Also, if the undocumented immigrants’ employers are paying them under the table, why isn’t the cartoonist complaining about the employers? Oh yeah, racism. Right.