Tax brackets are what we refer to as a numerical range of earnings that makes use of a certain rate for taxation. Every time a tax payer’s income shifts to over or under the range, they move to a different tax bracket.
Tax brackets happen to be a part of the progressive tax system. This means that as your income increases, so does the tax. The good thing about this system is that tax payers with a high income can easily afford the relatively high tax rate. Tax payers with a low income pay a smaller amount because they cannot possibly pay too much.
Tax bracket is another way you can refer to the marginal tax rate. This tax rate is the tax given on each extra dollar of income. The additional dollar is what is most commonly referred to by accountants as your last dollar. According to the progressive tax system, the amount of your earnings that fail to go over the top limit of the bracket is referred to as the last dollar.
Where Does the ‘Last Dollar’ Fall
So the question is how does one know their tax bracket? This is pretty easy. You can tell your tax bracket by looking at your taxable income. Taxable income is your adjusted gross income, after you subtract the itemized or standard deductions.
The Back Story
Early US taxes went through tons of changes until 1861 when the concept of income tax was established via the Revenue Act that same year. After that, the first tax brackets came about in 1862. The lower tax bracket used to be 3% of an income of $10,000. On the other hand, the higher tax bracket was one that levied 5% tax on income over $10,000. The reason that it was introduced was to help the union get money to the Civil War. In 1913, the 16th amendment to the constitution gave the government the power to levy an income tax.
In the 1980s, economists argued that income taxes were the reason for demotivating the working class. The changes made in the 1980s were aimed at increasing economic growth. Tax rates keep fluctuating since then.
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