Fiscal Cliff Deal May Have Created 'World's Smallest' Tax Bracket

Remember how President Barack Obama raised the nation’s highest income tax bracket to 39.6 percent as part of last month’s “fiscal cliff” deal? It turns out that, in an effort to keep the Bush tax cuts from expiring for all but the wealthiest Americans, the Obama administration may have inadvertently created what the Tax Policy Center says could be the world’s smallest tax bracket.

Under the recent deal, formally known as the American Taxpayer Relief Act of 2012, singles with taxable incomes falling between $398,350 and $400,000 are taxed at 35 percent -- formerly, the top bracket. Fewer than 500 taxpayers fall into this tiny bracket, which separates the ones above and below it by only $1,650, the Tax Policy Center reports.

“But for singles, a bracket this small is downright bizarre. For context, the 28 percent bracket covers $95,400 in taxable income. The 33 percent bracket covers a range of about $215,000. But $1,650? Seriously,” Howard Gleckman, the editor of the think tank’s blog, TaxVox, wrote last week.

For married couples (who don’t hit the top 39.6 percent rate until their joint incomes surpass $450,000), the 35 percent bracket covers a $51,650 income range, an amount Glockman wrote is “still fairly silly but at least approaches respectability.”

If the top 39.6 percent rate kicked in at $398,350 instead of $400,000, the relatively tiny number of taxpayers in the 35 percent bracket would owe the government an extra $75.80 per year.

The last time the U.S. had such narrow tax brackets was in 1976, when there were 25 rates ranging from 14 percent to 70 percent. The Tax Reform Act of 1986 drastically reduced the number of brackets in the tax code, lowering the top rate from 50 percent to 28 percent.