I promised i would explain this. You assume everybody already knows it but then you hear a generally smart person at work say something like, "Yeah, i didn't get a raise but that's ok because it probably would have put me in a higher tax bracket and then i'd lose more money anyway." That's not how it works, people!

By the way, this is also sometimes also called a progressive income tax but the word "progressive" has been co-opted by liberals running away from the word "liberal". In this case "progressive" means "the tax rate increases as income increases", same as "graduated", and doesn't imply a political goal.

I've created a table to show how our taxes work. It's big and ugly but it will make the point, so pop it up and follow along.

(A word on the numbers in the chart. They are based on the current actual rates for a single person, but i'm really just using it as an example. These are the numbers before deductions and Earned Income Credit, so no one is actually paying those dollar amounts. And while i double-checked the numbers, i did this (like most of my posts) in between meetings so it's possible there are errors. Again, this is to be used as an example. Please, please, please don't come back here in April and use this table to do your taxes.)

So the simple fact here is that you only pay the higher rate on the part of your income that falls into that bracket. So take the first guy who makes $20,000. The first $8,700 of his income are taxed at 10%. The rest (20,000 - 8,700 = 11,300) is taxed at 15%. Only the $11,300 portion of his income is taxed at 15%. The rest is taxed at 10%. And it works like that up the chain.

So if you are making $86,850 and you get a $100 raise, only that additional $100 is taxed at the higher 28% rate. So your total income can't go down by getting a raise. When there was talk of adding another tax bracket at $250,000, there really were crazy people who were trying to figure out how to limit their salaries to $249,999, which shows a complete lack of understanding about how this works (how come such stupid people get to earn so much money?).

Using this, we can see that lowering taxes on people making $86,000 or less will also lower taxes on people making more than $86,000, because their rate at the $35-86k bracket will be affected.

And if we raise taxes on the wealthy, it's only affecting their top brackets. So if we were to raise taxes on people earning more than $388,350 to 40%, it doesn't mean their entire salary is now taxed at 40%.

If we were to go back to the top marginal rates of the Eisenhower era of around 90%, what that would mean is that you'd effectively be creating a maximum wage of $388,351. Raising a CEO's salary beyond that number would have limited returns for them. Nowadays that top rate has been seriously relaxed, to the point where it seems odd that our top bracket ends at $388,351 when we have people making millions a year (From Wikipedia: "In 2010 the highest paid CEO was Viacom's Philippe P. Dauman at $84.5 million.[41] That year the top 500 executives earned a total of $4.5 billion in compensation, for an average of $9 million apiece.").

Finally, what happens if we do what flat tax proponents want and assign the same rate to all people. Right now that guy earning $20,000 has an effective tax rate of ~13% (again, remember, this is before deductions and EIC). Replace that with 20% (The Heritage Foundation is recommending a 28% flat rate that also eliminates the payroll tax, so i'm rounding down a bit) and that guy's tax amount is going from $2565 to $4000. That's probably putting him behind three month's rent and some grocery bills. Meanwhile, the $500,000 earner goes from $221,659 down to $100,000. Good deal for him! Now we know why right-wingers like this idea. It lowers taxes for the wealthy and raises it for the poor and/or reduces revenue to the government. "Simplifying the tax code" is just how they sell it.

But the flat tax thing is just an aside. The main point is to understand how our current income tax system works.