The New York Times story about the plight of families in the top 2% of the income distribution who don't "feel" rich seems to be based entirely on a misunderstanding about how the tax code works:
The article delves into the question of just who counts as rich. I think it's a silly question. Rich is a relative question. It doesn't mean you can buy everything you want. If you're in the top 2% of the income distribution, then you are, relative to 98% of the population, rich. You are more able to bear the cost of higher taxes.
But put that aside. The main problem with the article is that it presupposes that individuals making $200,000, or couples earning $250,000, will pay higher taxes. They won't. The tax hike only applies to income over that threshold. When you go from $250,000 to $250,001, you only pay a higher tax rate on that one extra dollar. Your taxes will go up by a few cents. If you earn $300,000, you will pay a slightly higher tax rate on the last $50,000 of your income -- less than a couple thousand dollars.
Even people making half a million dollars a year won't be "taxed at rates similar to those who make $5 million," because only half their income will be taxes at the top rate.
It seems like the wntire tax debate has been conducted under a could of basic ignorance about how tax rates work. Newspapers have characterized the Democratic plan as consisting of tax cuts "for the middle class," when in fact their tax cut plan applies to all income under $200,000/$250,000 -- meaning that everybody up to and including Bill Gates would get a tax cut under their plan. Part of this is due to reporters not understanding basic facts about the tax code. But I also wonder if the unconscious class bias of the media is at work. While people who earn more than $250,000 are a tiny, tiny proportion of the population, their plight has commanded an inordinate share of attention among reporters, not to mention members of Congress.
I have not read the Times piece, but it raises an extremely important defect in the marginal tax rate structure: too few brackets. A more equitable structure would include many more brackets. Flattening the brackets was part of the "reform" in flattening the marginal rates. As I have mentioned many times, our federal tax system today is essentially a flat tax system, with all income levels paying essentially the same marginal tax rate (if you include both payroll taxes and income taxes). It is true that this system penalizes the middle class, those earning in the $100,000 neighborhood, who pay the highest marginal rate (over 40%). Those in the higher brackets, including those earning $2 ... view full comment
I have not read the Times piece, but it raises an extremely important defect in the marginal tax rate structure: too few brackets. A more equitable structure would include many more brackets. Flattening the brackets was part of the "reform" in flattening the marginal rates. As I have mentioned many times, our federal tax system today is essentially a flat tax system, with all income levels paying essentially the same marginal tax rate (if you include both payroll taxes and income taxes). It is true that this system penalizes the middle class, those earning in the $100,000 neighborhood, who pay the highest marginal rate (over 40%). Those in the higher brackets, including those earning $250,000 and up, pay a much lower marginal rate. So if anybody has the "right" to complain, it's that engineer earning $100,000, not the banker earning $250,000 or more.
The phrases "individuals making over $200,000" and "couples earning over $250,000" is also misleading, as the cutoff is for individual whose taxable income is over $200,000 and couples whose taxable income is above $250,000. 401(k), flexible spending accounts, property tax, state tax, mortgage interest, and other itemized deductions can knock that figure down quite a bit.
The phrases "individuals making over $200,000" and "couples earning over $250,000" is also misleading, as the cutoff is for individual whose taxable income is over $200,000 and couples whose taxable income is above $250,000. 401(k), flexible spending accounts, property tax, state tax, mortgage interest, and other itemized deductions can knock that figure down quite a bit.
"But I also wonder if the unconscious class bias of the media is at work."
Hmm. Really?
"But I also wonder if the unconscious class bias of the media is at work."
Hmm. Really?
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Of course no one knows how tax rates work. But, (as dave_nedde notes) few people admit how deductions provide for a lower taxable income and people do include state or local taxes as part of their tax complaints.
Our notion of income or salary, a seemingly fair way of judging how much someone earns, means less every year. Does it include benefits, account for where live and how old you are? All are as important as the hourly wage or yearly salary. Tossing around figures like sixty grand a year or $250,000 (gross income) means nothing to people who know there are many variables that determine their net (what is left for them). Face it, a discussion that refers to gross income has ... view full comment
- Of course no one knows how tax rates work. But, (as dave_nedde notes) few people admit how deductions provide for a lower taxable income and people do include state or local taxes as part of their tax complaints. Our notion of income or salary, a seemingly fair way of judging how much someone earns, means less every year. Does it include benefits, account for where live and how old you are? All are as important as the hourly wage or yearly salary. Tossing around figures like sixty grand a year or $250,000 (gross income) means nothing to people who know there are many variables that determine their net (what is left for them). Face it, a discussion that refers to gross income has little basis in reality.
Not to mention Obama's AMT reform for individuals with less than $250,000 taxable income, which in most cases raises the tax cut threshold a bit.
Not to mention Obama's AMT reform for individuals with less than $250,000 taxable income, which in most cases raises the tax cut threshold a bit.
The blue-collar press has gone the way of the woolly mammoth.
The blue-collar press has gone the way of the woolly mammoth.
I mentioned this exact point in a comment on Jonathan Cohn's blog. Thank you for pointing this out!
I mentioned this exact point in a comment on Jonathan Cohn's blog. Thank you for pointing this out!
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