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The new US tax law, explained with cereal


Ever since they won control of the government in 2016. Republicans have been obsessed with getting this one thing done. Tax reform. We’re going to have a phenomenal tax reform. They’ve passed a bill, the President has signed it, so let’s break down what’s actually going to change.

Imagine that instead of getting paid in dollars, you got paid in cereal. The government takes a certain amount of cereal in taxes. And it uses it to pay other people to do things build roads, fly fighter jets, do research. You get the picture. The more you earn, the bigger the share of your cereal the government takes.

Sometimes the government wants to incentivize you to do certain things with your cereal. Like if you buy a house for a hundred pieces of cereal, and then sell it for 200 pieces of cereal, you’d normally have to pay capital gains taxes on that profit. But there’s a special loophole that says you don’t have to. The tax code is full of loopholes like this, which means if everyone puts their cereal together, there would be two bowls.

One that the government dips into for taxes, and one it doesn’t.

Now, Republicans want the government to take a smaller portion. And they say they want people to keep more of the cereal. But if they do that, the government won’t have enough cereal to pay for what it needs. So part of this new law is taking some of the cereal that’s not taxed, and change the rules so that it is taxable. That way, the government can take a smaller share of the cereal but still pay for the stuff it needs.

This is what politicians mean when they talk about ‘broadening the tax base.’ Here’s the problem: Republicans aren’t broadening the base enough.

They’re taking a lot less cereal from people and adding some new taxable cereal but not enough to pay for what the government needs. To pay for that stuff, the government is going to have to go into debt. This means they’re going to have to take even more cereal, years in the future to pay back the debt they’re taking out now.

Republicans think this will help grow the total amount of cereal available to both tax payers and the government. So what happens to that 1.5 trillion dollar gap? It goes back into people’s bowls but not everyone gets the same share.

If you break the population into five equally sized groups based on how much they earned in 2017 and look at how much each group will earn in 2018 every group does get a tax cut.

But fast forward ten years and you can see that lower and middle class Americans will actually pay more since their tax cuts aren’t permanent. And if you break that top group into smaller groups you can see the very wealthiest benefit most of all. So while this new law does close some loopholes to bring in new tax revenue The bill’s larger purpose is to realize the Republican vision of a fairer tax code.

One in which the wealthiest pay a lot less..

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How tax brackets actually work


These are tax brackets for 2019. Simple, right? But many of us make a common mistake when looking at this. Let’s say my income is $84,000. You might think that puts me in the third bracket.

So I would owe the federal government 22% of my income. This is wrong. And it’s causing us to have uninformed debates about tax policy. Here’s how it actually works. Let’s go back to my $84,000 income.

Now, instead of thinking of tax rates as brackets, we should think of them as pockets. But first there’s one special pocket we need to talk about. The money we put in this pocket is not taxed. The government automatically lets single people put $12,000 in this special pocket — and more for couples. But if you spend a lot of money on things like medical expenses or charitable donations, you can sometimes put in more.

These are called “deductions.” With the $70,000 that’s left over we can start filling up the pockets.

How tax brackets actually work

This first pocket has room for $9,700, so I only pay 10% on this money. Then I pay 12% on the money in the next pocket. And then 22% on the money in this pocket.

These are called marginal tax rates. And that’s how these brackets actually work. So if I get a raise, that new money goes into the first pocket with empty space. When space runs out, we put it in the next pocket. So the raise, and only the raise, would be partially taxed at 22%.

And partially at 24%. So, when politicians say they want to raise the top tax rate, it doesn’t necessarily mean these pockets — and your money — are affected. They’re talking about the tax rates on the pockets way over there, which are only used once people have filled in these smaller one. Marginal tax rates are a pretty simple concept, once you get the hang of it. So the next time a politician says the government wants to “take away 70% of your income” just send them this video.

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