Tax brackets and progressive taxation

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Tax brackets and progressive taxation

(lighthearted music) Voiceover: You'll hear the word "tax bracket" thrown around a lot, and there's often a misunderstanding of what a tax bracket is, so that's what we're going to do in this video.

I'm going to do it in a very general, simple way that doesn't use the exact same tax code of any particular country, but most countries use some kind of a progressive tax system, that has some type of tax brackets.

Let's say my country has a tax code that says between $0 of income and $10,000 of income you pay no taxes on it, and then between 10,000 and, let say, 50,000,

let me write that a little bit neater, between 10,000 and 50,000, so that's 50,000 right over there, you pay 20% of your income, and then let's just say, this is very simple; much simpler than any actual tax codes out there;

let's say anything above $50,000, you pay 30%. 30% of your income.

The reason why I say that there is confusion here is many people feel that if their income throws them into a bracket, that they pay 20% on all of their money, but that's not the way it works.

Let's just do a couple of examples.

Let's say that someone earns ... let's say income, and then let's think about how much taxes they will pay.

Let's say someone makes $5,000 in income.

The first $10,000 you pay no taxes, so they'd pay $0 in taxes.

Let's say someone has $15,000. $15,000 in income.

How much taxes would they pay?

They would pay 0% on the first $10,000, so it would be 0% x $10,000. x 10,000, and then the next 5,000, they're going to be right over here, the next 5,000 they're going to pay 20%.

So, + 20% x the next $5,000.

The next $5,000. They'll pay, this is just 0, then 20% of $5,000.

They will pay $1,000 in taxes.

The misconception that many people have is, "Oh, $15,000 puts me into this middle bracket, "so I'm going to have to pay 20% on all $15,000," and that's not the way it works.

You only pay 20% for the increment that throws you in that bracket.

Just for the $5,000. Let's do another example.

Let's say that someone makes $100,000.

$100,000. How much taxes would they pay?

It wouldn't be that they're in this last bracket, so they'd pay 30% on their entire $100,000.

They pay 0% on the first 10,000.

0% x 10; I'll just write "10K" for 10,000.

Then they'll pay 20% on the next 40,000. This range right over here.

So, + 20% x the 40,000, and then they only pay 30% on the increment of their income that is above this $50,000 threshold.

Then they will pay 30%.

They will pay 30% x the next $50,000, so 10,000 + 40 + 50.

That's what adds up to $100,000. x $50,000.

This adds up to, well, this is nothing.

20% of $40,000 is going to be $8,000.

Then 30% of $50,000 is going to be 15,000.

Is going to be $15,000. In this situation, the person will not pay 30% on the entire 100,000.

They will pay 8,000 + $15,000, which is equal to $23,000 in income taxes.

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Tax brackets and progressive taxation발음듣기

(lighthearted music) Voiceover: You'll hear the word "tax bracket" thrown around a lot, and there's often a misunderstanding of what a tax bracket is, so that's what we're going to do in this video.발음듣기

I'm going to do it in a very general, simple way that doesn't use the exact same tax code of any particular country, but most countries use some kind of a progressive tax system, that has some type of tax brackets.발음듣기

Let's say my country has a tax code that says between $0 of income and $10,000 of income you pay no taxes on it, and then between 10,000 and, let say, 50,000,발음듣기

let me write that a little bit neater, between 10,000 and 50,000, so that's 50,000 right over there, you pay 20% of your income, and then let's just say, this is very simple; much simpler than any actual tax codes out there;발음듣기

let's say anything above $50,000, you pay 30%. 30% of your income.발음듣기

The reason why I say that there is confusion here is many people feel that if their income throws them into a bracket, that they pay 20% on all of their money, but that's not the way it works.발음듣기

Let's just do a couple of examples.발음듣기

Let's say that someone earns ... let's say income, and then let's think about how much taxes they will pay.발음듣기

Let's say someone makes $5,000 in income.발음듣기

The first $10,000 you pay no taxes, so they'd pay $0 in taxes.발음듣기

Let's say someone has $15,000. $15,000 in income.발음듣기

How much taxes would they pay?발음듣기

They would pay 0% on the first $10,000, so it would be 0% x $10,000. x 10,000, and then the next 5,000, they're going to be right over here, the next 5,000 they're going to pay 20%.발음듣기

So, + 20% x the next $5,000.발음듣기

The next $5,000. They'll pay, this is just 0, then 20% of $5,000.발음듣기

They will pay $1,000 in taxes.발음듣기

The misconception that many people have is, "Oh, $15,000 puts me into this middle bracket, "so I'm going to have to pay 20% on all $15,000," and that's not the way it works.발음듣기

You only pay 20% for the increment that throws you in that bracket.발음듣기

Just for the $5,000. Let's do another example.발음듣기

Let's say that someone makes $100,000.발음듣기

$100,000. How much taxes would they pay?발음듣기

It wouldn't be that they're in this last bracket, so they'd pay 30% on their entire $100,000.발음듣기

They pay 0% on the first 10,000.발음듣기

0% x 10; I'll just write "10K" for 10,000.발음듣기

Then they'll pay 20% on the next 40,000. This range right over here.발음듣기

So, + 20% x the 40,000, and then they only pay 30% on the increment of their income that is above this $50,000 threshold.발음듣기

Then they will pay 30%.발음듣기

They will pay 30% x the next $50,000, so 10,000 + 40 + 50.발음듣기

That's what adds up to $100,000. x $50,000.발음듣기

This adds up to, well, this is nothing.발음듣기

20% of $40,000 is going to be $8,000.발음듣기

Then 30% of $50,000 is going to be 15,000.발음듣기

Is going to be $15,000. In this situation, the person will not pay 30% on the entire 100,000.발음듣기

They will pay 8,000 + $15,000, which is equal to $23,000 in income taxes.발음듣기

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