@@manujohn99 the government gives you that amount as a deduction that doesn't need to be taxed which is why the effective rate was 10.74% even though the weighted average would have been higher if all money was actually taxed.
The hard part about that is that (as we found out in 2018) lawmakers CHANGE IT !! Hahaha. It's hard to make a video that's got some long-term life to it. But we'll add it to our list!
It does significantly change the effective tax rate though. Those in lower income brackets often don’t make use of the deductions they could have. High earners make use of most of them. On top of that, the highest earners find ways to have income that is taxed even lower, like capital gains tax. So “discouraging wealth” is not really a concern in reality.
This would have been a better direction for the video. The US tax code isn't complicated due to the progressive tax system. It is because of all the numerous deductions and credits.
Some people think it’s better to avoid a raise so they don’t enter the next tax bracket ... But they don’t realize that it’s incremental! Good clarity 👍
The richer you are, the more available tax deductions are to you, as well as more expensive tax professionals to help you find ways to save on taxes. Also, the reason why our tax system is one of the most complex is NOT because we have a progressive tax system!!! Not even remotely. It's about the format, countless loopholes, and (most importantly) the fact that each citizen has to completely figure out and submit our taxes then the government checks it over for mistakes. While in other countries, it's the exact opposite!! The government files everyone's taxes and submits them to each citizen, where they may look over it and see if there are any additional income sources or deductions that were missed
Mr. Sharp a simple tax without doubt will be better for tax collection and the economy, now the rich pay a lot to avoid taxes because there is a lot to be gained a simple tax code will be better for everyone and it would make the economy for efficient (because of less deadweight). We need a simple tax code not the government to do our taxes
@@vicenteyanez671 but that's how many other 1st world countries make their tax system simpler. In my opinion, it's best to not try and reinvent the wheel. There is a lot we can learn from other countries. But neither of our ideas will ever be put into action with in the near future because there are literal thousands of companies that lobby against because they profit so much off of our confusion
Mr. Sharp you are definitely right, its very unlikely the tax code will ever be reformed, too many god damn lobbyists, and most people don’t even care.
At 1:10: One of the main reason why taxes are so complicated to file in the US is because Intuit (makers of TurboTax) have lobbied against simplified filling for decades.
@@OGBhyve i dunno 3 or 4 of my colleagues, same jobs.. dont even buy stocks or anything, use tax preparers. Some people are really just dense or have been told repeatedly "taxes are hard".
@@aakksshhaayy In most countries the IRS does it for you and hands you the paperwork in case you have any complaints about something they forgot. The US could basically already do this.
I think the main problem with the United States tax system (that I think most of us can agree on) is that it’s not used correctly by the government to fund public service adequately enough 🤷🏽♀️
The welfare system in the United States is currently considered an imbalanced and flawed system, yet hundreds of billions of dollars are poured into it every year
Belgian here. It's true, our taxes are huge and we are only talking about income tax in this video. You'd be amazed at the plethora of all other tax rates we pay here!
@@JPWRana that is true but there are caveats. Politicians are frequently openly caught directly profiting of public money but more importantly: our services are good but people also become very dependent of these same services and thus the government. Finally: with the huge wave of retirements and longer life spans, our deficits and debt are increasing rapidly and the whole system is crumbling under its weight. New taxes are very unpopular as well as cutting in government expenses Both are very hard to defend in the climate of the ridiculously high tax rates we currently have.
The system of tax brackets isn't that complicated - it's the tangle of tax deductions and tax credits (plus the other categories of taxed wealth, like capital gains, dividends, inheritance, etc.) that confuses people. I think we'd all love to see a video about that!
jsteele07189 I didn’t understand a single phrase in the second clause of your sentence. Hope Two Cents sees this and makes this video-god knows my school would never teach personal finance/taxes.
why In the hell werent we taught this in school, this is making me extremely angry I would say 60% of things that were taught in high school are completely useless as an adult
Agreed. In US high school I was getting As and Bs. Went to Community College and everything I learned in high school was useless. It is in College that you may learn something if you take the right classes. My advice take economics and tax preparation classes. In the tax preparation class you find out that your 401k reduces your earned income based on how much you contribute. If you are dirt poor you can qualify for the earn income credit. You can deduct your gambling losses and you get my drift.
India also has progressive tax and we were taught this tax calculation in 10th grade, disguised as mathematics. And I feel thankful to my education system for doing one thing right in my education.
*GREAT VIDEO GUYS* | Yes, our tax system is complicated, but that’s partly due to the government wanting to push or incentivize certain types of activities such as rental properties, self-employed businesses, depreciating assets, etc. BUT we do end up taxing higher earners a lot more than we tax lower-income earners when factoring in deductions. VERY SIMPLE AND GOOD EXPLANATION! 😎👍🏻
Only criticism is the usage of the word "fair", a morally loaded term, when talking about proportional taxation. "Fairness" can be argued for any type of taxation as "fairness" is a subjective term, not so much an objective analysis.
@Traplover, That's their WHOLE point of using that word. We're taught that word in early childhood under terms synonymous with "equality" and "just" and now we expect adults to somehow have a different moral definition of the word. Not saying your criticism is wrong, but it's incredibly/unrealistically wishful. You're dealing with people's money, political views and emotions all in one topic. So yeah, the word "fair" is absolutely valid in this conversation/topic.
@@Everydayprojects365 Isn't the worst thing, that sometimes fair is equal too. The thing is that there are people who want unfair because they are in the better position, in terms of tax that is.
MorgurEdits yea like if one works more hours and gets more money it’s both fair and equal lol this is true.we need more education in this country period.
Personally, I don't mind having to pay taxes, I've always held the mantra of 'Taxation is the price you pay for living in a civilized society.' Greetings from the UK! Really enjoy the insight into life in the USA that your videos give!
Agreed. They have all of last year's info (for most of us) just adjust what is needed, send me an "invoice" and I can pay it. Abdul . Work more and make more. Not sure how you would need to know how much you can make, unless you are a means tested program that would take benefits away for doing better. Disclaimer: I support a #FreedomDividend or UBI yang2020.com
It has been proposed several times in the past, but was quickly shot down thanks to aggressive lobbying from tax prep companies like H&R Block and Turbo Tax
Funny how they didn't talk about capital gains in this video... Which is how most of rich people actually earn their money. Those tax rates are way lower.
You don't want high capital gains taxes. Capital gains is a main driver of the economy and is why most people invest in something, start a business, or be an entrepreneur. A lot of that would dry up if it was taxed like regular income.
@@Josh-179 Common republican myth... Many, even most, people who start their own business never see the type of capital gains that we're talking about. Both of my parents owned small businesses, neither we millionaires or paid in stocks. Most "entrepreneurs" in this country operate similarly- childcare providers, plumbers, carpenters, lawn maintainers... These businesses are rarely structured to award stocks in lieu of wages to their owner/operators. People like myself are motivated to start a business not for the attractive tax rates, but to build something of our own. To put the work in for yourself, not the boss. That said, it is possible to write policy that demotivates business ownership, but simply adjusting the way the wealth of the uber-rich is assessed isn't automatically going to end all small business.
Capital gain increase would affect people of every income bracket who have a retirement. Not everyone is paid in capital gains but a majority of Americans have retirement funds
Greetings from Belgium where income tax is indeed that high. Minor edit: rates for the 2019 fiscal year: 0€ -> 12 990€ = 25% 12 990€ -> 22 290€ = 40% 22 290€ -> 39 660€ = 45% 39 660€ -> beyond = 50% (39 660€ ~ 44 000$) In addition most goods and services have a value-added tax of 21% Oh and there's also a flat income tax with rates that vary depending on the city in which you live. Keep up the good work, your content is great!
Public school failed me and numerous other students when it came to learning about finances. You would think there would be a class or some type of program that involves the youth to prepare them for you know...life.
Some numbers to think about (as of 2020): The top 50 percent of all taxpayers paid 97.7 percent of all federal individual income taxes, while the bottom 50 percent paid the remaining 2.3 percent. The top 1 percent in America paid 42.3 percent of all income taxes in the country. Is that fair?
Been binge watching Two Cents for a few weeks now, I've learned more from their videos than I have from any high school class or wanna be finance guru. Love the content and the explanations, graphics and examples are great tools that help me stay along the path of learning something new without getting lost thank you so much!
I don’t mind paying taxes. I just mind having to take hours of my time to file complicated tax returns in order to do it. The IRS should do this for us, plain and simple.
I agree and other countries already do the taxes free of charge for their ppl since they already have all the information. But that would mean private companies like HR Block, turbo tax etc. would go out of business so of course they spend millions in lobbying against this *sigh*
My taxes should be processed by the government, and I should only have to do any work if I notice a problem or need to apply for special tax breaks. That's how a lot of other counties do it. Let's stop being backward and wasting time/money. Come on, people!
would it surprise you to know companies like turbotax and H&R Block have lobbyists that want to keep the tax system complicated because it gives a reason for their software company to exist. If taxes became easy tomorrow, turbotax would go out of business.
@@wetokebitcoins1769 I don't know why. We still have H&R Block IN Australia, and my return takes 5.minutes. They would just have to.move into the financial planning spaces rather than just filing paperwork.
Great video! The complexity comes from having non-standard taxes, for the most part. If all you did was work as an employee and file with your W2s, it would be simple. It gets WAY more complex when you add anything like: -Working for yourself (if you earn more than $400 doing something on the side, you have to file that in as self-employed income) -Investments of any kind -Living/working abroad -Benefits of any kind -Deductions of any kind ...or any other non-standard circumstances. It takes me hours to do my taxes each year, because I need to make sure I'm filling out all the paperwork correctly and submitting everything necessary for my specific circumstances. This video is a great primer to the US tax system, and I especially like how you hit on the fact that tax brackets are marginal. That's an important point to understand.
At 4:00, the chart is to be read sequentially, if I'm understanding this right. The first $9,525 is taxed at 10%, the next $9,526 to $38,700 is taxed at 12%, and so on and so on. I just wanna make sure I'm getting it. Also, how were the deductibles calculated?
Sure that's the Belgium's tax rate but you're forgetting to include that social services are included in that tax rate and they don't have state income tax. Here is an example for your same calculations if we live in the state of Oregon. 10.74% effective federal tax, 9.1% State income tax, 6.2% Social security tax and 1.1% medicare tax. So a resident making that amount of money in the state of Oregon would pay in excess of 27% tax on their income and then pay another couple of hundred a month at least for private health insurance in the end we pay WAY MORE taxes than people in Belgium compared to what we actually get back from the government. PS. I wish we could exempt ourselves from social security tax and Medicare tax but we can't so you should add it in there.
Wow, what a video. I live in Sweden and we are the best in the world at collecting taxes. Declaring here only takes 5 minutes because the government does all the leg work for us. We have progressive taxes because it is the best and the most fair! Those who earn the most have most left in the wallet, of course! They also have the best opportunities to contribute to everyone's common welfare and thus pay the most in taxes. Also, the money is much more evenly distributed to the people. Healthcare, education, etc. is free for everyone, no matter how much you (or your parents) earn. Go Sweden!
Same with Israel. You don't spend any time on taxes at all. The employer pays it automatically and self-employed/unemployed people are just signed into a system where the government deals with the banks automatically or as a business you have a person that does it all for you.
Thank you for your explanations on the US tax system. I thought our Canadian system was complicated, however your efforts have further clarified this topic for me.
One thing I like about the system in Sweden, Skatteverket (aka IRS) do the counting for you, all you have to do is read the details (only a few pages long) and sign - Done!
You guys explained this way better than in my high school economics class. Wish I watched this before I filed my taxes to understand how everything worked
Hey, we got progressive income taxing Norway as well, yet I get my tax code prefilled. I don't even have to send it back if it is correct. If there are any additional deductibles I fill them in online and thats about it. No papers. If I had to fill it out on my own from scratch, I am sure I would have used 13 hours myself 😅
Thanks for making that comment about how a progressive tax bracket can help offset the sales tax, I literally changed my opinion on opposing progressive taxes. Although, I'd be totally okay with abolishing property and sales tax and only taxing income.
Where I live we have a 6% sales tax and another 6.5% "prepared foods" tax on top of that. If you're poor and spend every dollar you earn (most impoverished people have no savings), your effective tax rate falls between 16% and 22% as a result. Talk about regressive!
You should do a video on everything we get for our taxes versus how much more other countries get with their taxes. This is only a slice of the whole story.
I like this video. I like a lot of your videos, my one gripe is the line about our tax system being complicated because incomes are taxed at different rates. From a brief search the same seems to be true for Japan, which is a country you cite as having a much simpler tax system.
Other tax details few people are aware of, in increasing order of how much you'll be ticked off ... Our tax rates aren't fully progressive due to payroll taxes. At about $133k, the effective tax rate *drops* by 6.2% since social security payroll taxes aren't charged on income above $133k. Payroll taxes weren't shown in the tax brackets presented in the video, but they should have been included to highlight this issue and highlight that the actual tax rate of someone making $60k is really about $18%, not 10.7%. Investment returns, which is how most of the uber rich make most of their money, are taxed at a lower rate than what many people pay for income they get for, ya know, working. Additionally, investment income is *not* subject to payroll taxes, so think of investment income as getting an automatic 6.2% social security + 1.45% Medicare = 7.65% tax break. So the lesson: be rich, sit on your but, and make tons of money. Real estate loopholes are where the real savings lie. If you own a property and charge rent, that rent is income, but the property "depreciates" at a substantial rate, meaning the property owner can often write off most if not all of the rental income due to this depreciation. That is, if I buy a $300k property and charge $2000 per month in rent, I make $24k -- but I'm not taxed on $24k. Instead, I get to subtract my mortgage interest (probably ~$10k) as well as up to 3.6% of the property value for the first ~27 years of ownership (so about $11k each year), which means ... for my $24k in income, I'm taxed on $3k. Real estate, part 2. Yeah yeah, but the property owner will be *eventually* taxed, right? Not necessarily. While the owner could deduct "depreciation" from the income for the property, that property was *actually* appreciating in value. So let's say they sell the property after 15 years for $500k. At that point, they would be taxed on the $200k profit from the sale plus about $175k in "depreciation" that they used in tax offsets. But they probably won't. If they reinvest that $375k back into another property within a couple months, they call it a "wash" sale and postpone paying those taxes until they sell that newly purchased property. And guess what ... they can keep doing this indefinitely. These special real estate loopholes allow property owners to avoid paying almost any taxes *ever* on their income. They defer forever. So you might be guessing: these super rich real estate tycoons' property is finally taxed at death, right? LOL, you are way too optimistic! When someone dies, their estate doesn't pay capital gains / investment taxes. They are effectively forgiven. CURRENTLY the people who inherit the property will be taxed if their inheritance is more than $11.4 million (per person). Oh, and it's of course easy for them to lowball the actual value of the property to also dodge this tax ("that $40m apartment building? uh... I think it's worth $10 million. oh, that means I don't have to pay any tax? how convenient!"). But at least those estate taxes are here to stay, right? For real, where do you get this optimism??? Republicans have dubbed the estate tax the "death tax" as a way to market it as something evil. They've been trying to repeal the estate tax for decades. If they're successful, then families running real estate businesses can defer taxes forever, and pass their millions, or even billions, of dollars in property down through the family without ever with an effective tax rate of perhaps 3-5%. Have I ruined your day?
@@MarekBush21 For sure, take advantage of what you can, but also recognize the uber rich are screwing even the small real estate players since you won't have access to the same efficiency and number of tricks as them. Good luck.
Can't live life looking to blame others. There are a lot of people who have more privilege than me right now. There are a lot of people you and I have more privilege than. Doesn't inherently mean we're doing something wrong to people with less. The government encourages certain behaviors with tax breaks because things like starting a business and developing, creates jobs and places for people to live. This stimulates the economy. So again, jump in the game and play rather than focusing on things you cant control.
@@MarekBush21 I am confused why you think owning a rental property "creates jobs" or creates more economic value than someone who's actually doing work. Renting out property also doesn't create any more economic value than a homeowner, who also has to maintain the property by hiring people to do work on it. But hey, you're entitled to your opinion that cronyism and lobbying is cool and good for the economy, and I also enjoy having my own opinion that handouts to the rich are bad economic policy and reflect a market inefficiency.
@@dosadoodle you can see how being a homeowner might require one to bring in a handyman from time to time but you dont understand how being a landlord who owns 15 properties creates jobs for painters, plumbers, maintenance men, carpet installers, cleaners and the like in between renters? You also conveniently ignored all the jobs a new business creates? Either way I choose to focus on what I can control.
I am not sure if there was an issue with the audio recording or the delivery, but Phillip was easy to hear while Julia was sometimes difficult. I usually do not have a problem with your videos and love the content.
You should do a video on what Americans get for our tax dollars, comparing it to what other countries get (i.e. Canada, the Netherlands, etc.) Healthcare, education, social services, easy access to business loans, etc.
I am Black American living in the UK for five years. I have learned and experienced so far that I see the UK tax system is progressive. So I feel that historically UK left the USA with the progressive taxes system to use. And possibly the USA wanted to have different options for taxes so each U.S. State can decide which taxes to use from. Thank you for posting this insightful video.
Very good video explaining a complicated subject. Now explain investments and the definitions of terms in the financial industry. Like how the word dividend means different things depending on what product you are talking about. Is it a profit sharing? Is is an interest payment on a loan paid to the bond holder or is it a refund of excess premium for over paying for insurance? It's all three... No really the financial industry is really interesting and can be confusing but getting it wrong means you're going to suffer when you're old.
Hello! I recently started watching your videos and really like how you dreakdown all these info in ways that average people like myself can understand easily. Please, do a video on living trust and how it works :-) the topic of creating a living trust and its' benefit have always been a little confusing to me and I'd like to gain a firm understanding of it.
Thanks for clarifying! I was recently told that if I made even one dollar too much, I would be put in a higher tax bracket and make less net income than if I earned one dollar less and fell into a lower tax bracket!
The 22% tax bracket is a wide income range. Frankly 38k and 82k difference in certain areas, particularly NY or NC makes a HUGE difference. A single person living on 38k in Raleigh NC for example has a lot less disposable income than someone making 82k there. Same for 38/82 in NY, especially in the city, 38k in NYC has to be borderline poverty level and I know some people making 60k in NYC barely getting by each month.
You guys should do a video on Earned income tax credit (EITC), a lot of people view it (from what I have seen) as a better alternative to raise low income families wealth than a min wage hike.
This is an important video. I hate it when people say "why would I want to be rich if I'm taxed at 70% and I really don't get to keep anything?" Yeah, they have no idea that only a portion of their income would be taxed at the highest rate. I support a progressive tax system because, it might not be fair, but it's just. Nobody truly needs more than a 1/4 million dollars per year, do they? Not really. Taxing everything above that at 70% or even 90% doesn't spur laziness. Why would anyone just give up making more when they hit six figures just because they will be taxed slightly more? I'm no psychologist, but I don't see anybody voluntarily making less than $9,000 per year just to be taxed as little as possible. I myself would rather make $100,000 taxed at 50% than $9,000 taxed at 10%. You know why? Because keeping $50,000 is better than keeping $8100, even if I was taxed more.
A deduction reduces taxable income. They could mean many things. There are various things that you get a deduction for like paying taxes on your house, or the interest part of your mortgage payment or things you donate to charity. If you do not have enough of these kinds of expenses, then you get to take what they call a "standard deduction" which is a set amount. When you subtract these deductions out, you are left with taxable income. You are not taxed on everything you made; just what was left after paying certain deductible expenses.
The one thing that wasn't mentioned about the countries that have a higher tax rate is that they're often getting more in return for the taxes they pay.
Why do some CEOs take $1 salaries? Is it to avoid taxes? Not too sure but I think I read somewhere that they (CEOs) take most of their money through dividends and taxes on dividends are low. Kindly shine more light on this for me or better yet make a video on it 😁. Explaining the rational behind the $1 salaried CEO.
What if we had no income tax but only relied on sales taxes and tariffs (not saying protectionism is a good policy, but that was what we had before income taxes) like before income taxes were enacted? The only exceptions to these taxes would be food and clothing because those are essential goods that everyone buys, so sales tax and tariffs would only cover nonessential goods and commodities. In my opinion, an income tax itself is bad because people are basically being taxed for being productive members of society and having an income so I don’t think a flat or progressive income tax would be good though. Great video though, as usual. :)
K-Tech PL I personally have a problem with land value taxes because they are (1) involuntary and sales taxes are at least semi-voluntary and I don’t think people should be forced to pay a tax based on what their property is worth, and (2) just because someone’s property value is X, doesn’t mean they will be able to pay a percentage of its value just because they own it, like in the case that someone inherits property from their rich relative that’s worth more than they can pay.
You asked so I'll answer. NO this tax system does not encourage laziness or not wanting to make more money. Okay yeah I would have to pay more taxes but I wouldn't have to worry about buying food, gas, paying rent, or my light bill. Thats some bullshit. No one wants to be poor
Its crazy how income tax in Canada is aucttly cheap for some brackets for example 48,535-97,069 is taxed at 20.5% but someone earning $9k/year has to pay 15% because the first 48,535 is taxed at 15%
Wow thank you for this, very informative. It’s crazy that I’m 25 and never learned this in school. Didn’t learn it at the $80,000 college I went to either.
In my opinion I would rather have a set rate percentage tax. I have middle income parents where they can’t even use their taxes for government programs. We don’t get FASFA, medical care insurance, Tuition Assistance etc. Yet, the government says if I get pregnant and have a lot of children under 24 I can qualify as a independent. I do know people who take advantage of the system. I want to know how I can prepare myself with knowing what is a Tax Credit and Tax Deductible. There are others in saying their are loopholes which I want to learn.
Most working Americans pay more in payroll taxes than income tax, and the biggest part of that is Social Security tax, which is capped and hence more regressive than sales tax. Also, progressive tax rates add next to nothing to the time needed to file taxes. The complexity has to do with deductions and adjustments to income and the fact that much investment income is taxed at a lower rate than income from work.
A good video that is worth the watch. I clearly shows how the US Federal Income tax is implemented. It's also fair at comparing arguments for and against the progressive tax system.
Great video but the math was wrong when you subtracted 60,000-13,200= 47,800...it’s 46,800.. so all the calculations done here was off lol, but other than that great vid
I fail to see how progressive taxes disincentivize higher incomes. Whether it's taxed or not, you still get more than if you stayed at a lower bracket.
pawala I know someone that works at a hotel and is also self-employed. Her salary from the hotel was low enough to get her Medi-Cal (medical In California at almost no cost), but she keeps her income from her side business low enough for her to keep her benefits. So if she can only make up to $40,000 in order to keep her benefits, the hotel salary is $30,000 and she can only make about $9,000 from her side business. I know this example wasn’t about the tax bracket, but I imagine that it must be similar.
I could see if I was making $500,000 and was offered a $60,000 raise to put in a certain amount of extra work, that if I would only get $37,800 after taxes that I might just choose to take the extra free time.
*It made a ~little~ more sense back when Ronald Reagan was a millionaire movie star in California, where the top marginal tax bracket was like 90% or something. But now taxes are way lower, and it's undeniably just an unsustainable race to the bottom.*
@@DavidAWA That only applies to the top 1%. The average American barely makes up to $60,000 so that changing brackets barely affects the money they need to survive and be happy.
Yes. You dont pay much taxes in the US compared to other countries but you don't get health care, child day care or higher education which is covered by any developed country. Not worth the tax break in my opinion.
In the government's point of view, it is probably less about being fair and more about how much they can squeeze out of every tax payer without upsetting them. That said, it is true USA tax rate for middle class income earners are lower than most (if not all) developed countries. It is also true that the filling tax, at least for me, is a very lengthy process. Takes me a few weekends to complete. I'm sure you're gonna cover this soon. Tax deduction. USA has many good areas to deduct tax, it is actually very friendly to wealthy people or should I say people in pursuit to be wealthy.
There's a video idea for you, how to properly use your elected representatives. (No, not leaving angry messages on their Twitter or Facebook page, the right way...)
From where they got the amount of $29,175 for the %12 tax bracket? Update: When I subtracted 9,526 - 38,700 it gave me the $29,175; I guess that's how you come up with the amount to be subtracted from your tax income if you need to go up with the percentage of the tax brackets.
Shalon Garcia yes, only the amount of money you would have made in between $38,700 and $9,526 would be taxed at that rate. So as another example if you actually made $36,000, $36,000-$9,526 = $27,474 of your income taxed at that 12% rate!
