Tax the Rich – Understanding our Tax Systems
Last week, I sent my first email with the subject line “Tax the Rich.” On a good day 2-3 people will reply to emails. That email got over 30 replies asking me to continue the series, so here I am back for part 2. You can read part 1 here if you missed it.
I decided these emails would also be put into a blog format. I’m a big fan of building foundational understandings also. This email is going to lay a lot of groundwork for the future topics I have planned. If you want to skip my fun anecdote and already understand marginal taxes, you can skip to the “Progressive vs. Regressive” header.
Fun personal fact for you. I’m a big WNBA fan. I’ve splurged for a courtside seat, have traveled to see games, and record them all to watch at home. Recently, in a fun wow-all-my-worlds-are-coming-together moment, one of my favorite players, Kelsey Plum, made some news with a bit of a tax oopsie.
Earlier this year, the WNBA signed a new collective bargaining agreement. It increased star salaries from a cap of $250,000(ish) to a possible $1.4 million. Kelsey, a multi-time All-Star and key, number one player for the Los Angeles Sparks, signed a new contract for $999,999.
It’s somewhat common for players who you’d assume could get the full $1.4 million to take a lower amount in order to build a better team.
If you’re unfamiliar with professional sports, teams have a total salary cap they can spend. For example, assume the team has 12 players and the cap is $7.2 million. The team may not exceed that cap in total for their player salaries. That shakes out to an average salary of $600,000 per player. If one player takes an $800,000 salary, that means another would get $400,000 to keep the average salary at $600,000. So you can see here why a star player may take less money to bring in more talent and build a winning team.
Regardless, $1 under a million is a funny number. Plum is known as a jokester, so fans and media chalked it up to her just making a moment. Other fans, said “Well she probably wanted to avoid California’s $1,000,000 tax bracket. Those of us who know better explained why that didn’t make sense and assumed Kelsey had a team of professionals to explain this as well, but then she was asked in an interview.
Her response:
"If you claim a million dollars, I saved $13,000 in not claiming a dollar.”
Here's the thing. She's not uniquely wrong about this. This is maybe the single most common tax misconception in America. The fear that crossing into a higher tax bracket will somehow cost you money on everything you've already earned is so widespread that a professional athlete, surrounded by financial professionals, repeated it confidently on camera.
The Myth: Crossing a Tax Bracket Costs You Money
Here's the fear people have: "If I make one more dollar, I'll jump into a higher tax bracket and owe more taxes on everything I've already earned."
This is false.
The U.S. uses a marginal tax rate system. That means higher rates only apply to the dollars within that bracket, not to every dollar you earned. Think of it like a staircase, not a cliff.
Here's a simplified example. Let's say the tax brackets look like this:
Income from $0–$50,000: taxed at 10%
Income from $50,001–$100,000: taxed at 22%
Income over $100,000: taxed at 32%
If you earn $101,000, you don't owe 32% on all $101,000. You owe:
10% on the first $50,000 = $5,000
22% on the next $50,000 = $11,000
32% on the last $1,000 = $320
Total: $16,320.
That's an “effective rate: of about 16%. In other words about 16% of the income went to taxes, not 32%.
You can usually determine a very rough estimate of your effective tax rate by average the rates of the brackets most of your income falls into. For example, the average of 10% and 22% is 16%.
In our example, the extra $1,000 only cost you $320 in taxes. You netted $680. You are better off. You should always take the raise.
Kelsey Plum's extra dollar would have cost her 13 cents.
Progressive vs. Regressive: What These Words Actually Mean
Now that you understand marginal rates, let's zoom out.
Most tax systems fall into one of two categories, progressive or regressive.
A progressive tax is one with brackets, like our federal income tax. The more you make, the higher percentage you pay.
A regressive usually comes in the form of a flat tax. The rate is not literally higher for poor people. Rather the flat rate takes a much bigger bite out of a smaller income.
Here's the real-world version of this. Imagine a 10% sales tax on groceries.
A family earning $40,000 a year might spend $8,000 on groceries. That's $800 in tax, 2% of their total income.
A family earning $400,000 a year might also spend $8,000 on groceries. Same $800 in tax, but now it's only 0.2% of their income.
Same dollar amount. Same rate. Wildly different impact. That's regressive. Now, of course those who spend morre are probably going to have a larger budget for fancy cheeses and whatnot, but you get the point.
A Brief History of How We Got Here
Before 1913, the U.S. government funded itself almost entirely through tariffs, taxes on imported goods. Tariffs are regressive.
They raise prices on consumer goods, and lower-income households spend a higher share of their income on those goods. Sound familiar? And are we surprised why our current administration loves them? Say it with me class: “Who pays eventually the tariff? The end consumer pays the tariff. WE pay the tariff.”
We'll come back to this in a future email.
The progressive income tax was first introduced by Abraham Lincoln in 1861 to finance the Civil War, then repealed in 1872. It returned permanently in 1913 with the ratification of the 16th Amendment. When it launched, the top rate was just 7%, and only households earning the equivalent of $80,000 today paid anything at all.
Rates climbed sharply during wartime. The top marginal rate hit 94% in 1944 to fund World War II, and stayed above 90% through 1963, including the entire Eisenhower administration, which nobody seems to remember when they talk about Ike like he was some small-government conservative.
Guess which president sharply dropped that top rate.
Reagan, of course.
He dropped the top rate to 50% in 1981, then to 28% by the late 1980s. It's bounced between the mid-30s and low-40s ever since. Today it sits at 37%.
One important nuance worth knowing: a 91% top marginal rate sounds insane, but in practice the wealthy paid far less due to deductions and tax shelters. The effective rate on the top 1% in the 1950s was closer to 42%.
Statutory rates and real rates are very different things, and that distinction is going to matter a lot in the next email.
The Payroll Tax Problem
Here's something most people don't know: the taxes taken out of your paycheck for Social Security are actually slightly regressive.
In 2025, the Social Security tax only applies to the first $176,100 of income. Every dollar you earn above that is untaxed for Social Security purposes.
So if you earn $50,000, you pay Social Security tax on 100% of your income. If you earn $1,000,000, you pay it on roughly 17% of your income. The flat rate looks equal on paper, but the effective burden is much heavier on lower earners.
This is one of the many reasons tax policy is more complicated than any politician's soundbite will ever capture.
Why I'm Writing About This
Same reason as last time: Taxes are our single biggest expense. Understanding how they actually work, not how your uncle thinks they work, not how a viral clip makes it seem, is one of the most valuable things you can do for yourself financially and civically.
In the next email, we're going to apply all of this to a very real proposal currently sitting in Congress: a bill that would eliminate the federal income tax entirely and replace it with a national 30% sales tax. That bill is called the Fair Tax Act, and understanding progressive vs. regressive taxation is the exact foundation you'll need to evaluate it.
Stay tuned.
Best,
Braden
P.S. here’s a photo of me doing a CrossFit competition in my Kelsey Plum jersey.
