chAPTER ThiRTEEn • DomEsTic AnD Economic Policy 315
Loophole
A legal method by which
individuals and businesses
are allowed to reduce the
tax liabilities they owe to
the government.
Progressive Tax
A tax that rises in
percentage terms as
incomes rise.
Regressive Tax
A tax that falls in
percentage terms as
incomes rise.loopholes and lowered Taxes
Individuals and corporations facing high tax rates will adjust their earning and spending
behavior to reduce their taxes. They will also make concerted attempts to get Congress
to add loopholes to the tax law that allow them to reduce their taxable incomes. When
Congress imposed very high tax rates on high incomes, it also provided for more loopholes
than it does today. For example, special provisions enabled investors in oil and gas wells to
reduce their taxable incomes.Progressive and Regressive Taxation. As Table 13–2 below shows, the greater your
taxable income, the higher the marginal tax rate. Persons with large incomes pay a larger
share of their income in income tax. A tax system in which rates go up with income is
called a progressive tax system. The federal income tax is clearly progressive.
The income tax is not the only tax you must pay. For example, the federal Social
Security tax is levied on all wage and salary income at a flat rate of 6.2 percent. (Employers
pay another 6.2 percent, making the total effective rate 12.4 percent.) In 2013, how-
ever, there was no Social Security tax on wages and salaries in excess of $113,700. (This
“cap” changes from year to year.) Persons with very high salaries, therefore, pay no Social
Security tax on much of their wages.
In addition, the tax is currently not levied on investment income (including capital gains,
rents, royalties, interest, dividends, or profits from a business). The wealthy receive a much
greater share of their income from these sources than others do. As a result, the wealthy
pay a much smaller portion of their income in Social Security taxes than do the working
poor. The Social Security tax is therefore a regressive tax. To fund Medicare, a combined
employer/employee 2.9 percent tax is also assessed on all wage income, with no upper limit.
During 2011 and 2012, Congress and the Obama administration agreed on a
2 percentage- point reduction in the Social Security payroll tax. The break, instituted as an
economic stimulus measure, ended after the fiscal cliff negotiations in December 2012.What kind of Tax system Do We have? The various taxes Americans pay pull in different
directions. The Medicare tax, as applied to wages and salaries, is entirely flat—that is, neither
progressive nor regressive. Because it is not levied on investment income, however, it is regres-
sive overall. The federal estate tax is extremely progressive, because it is not imposed at all onTABlE 13–2: marginal Tax Rates for
single Persons and married couples (2013)
Single Persons Married Filing Jointly
Marginal
Tax BracketMarginal
Tax RateMarginal
Tax BracketMarginal
Tax Rate
$0–$8,925 10% $0–$17,850 10%
$8,926–$36,250 15% $17,851–$72,500 15%$36,251–$87,850 25% $72,501–$146,400 25%
$87,851–$183,250 28% $146,401–$223,050 28%
$183,251–$398,350 33% $223,051–$398,350 33%
$398,351–$400,000 35% $398,351–$450,000 35%
$400,001 and higher 39.6% $450,001 and higher 39.6%Copyright 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
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