How Obama wants to cut taxes on million-dollar incomes

By Felix Salmon
August 13, 2010
Thoma, Klein, Marr.)

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8-12-10tax-f1-infocus2.jpgWhat happens to people on seven-figure incomes when they pay lower taxes on their first $250,000 income, but higher taxes on the rest, as the Obama administration is proposing? It turns out that they end up paying fewer taxes altogether: $6,349 less per year, on average. (See Thoma, Klein, Marr.)

This is definitely not what I would have expected. For households in the $200k to $500k range I can see that the benefits from the lower-income tax cuts might outweigh the costs from the higher-income tax hikes — but once you’re earning over $1 million, the vast majority of your income is subject to higher, not lower, taxes. And still you end up saving money with this bill!

I’m sure there comes an income point — $2 million? $5 million? more? — where the Obama bill ends up being a net money-loser for the ultra-wealthy. But it would be good to publicize that point, and say that the bill being called a tax hike actually lowers taxes for everybody up to (say) $3 million a year, or whatever it is. That would surely make it harder to oppose, no?

Update: According to scarpy, in the comments, this graph doesn’t show proposed 2011 taxes compared to 2010 taxes, as I naively assumed; instead it shows proposed 2011 taxes compared to what taxes would be in 2011 if the Bush tax cuts expire and nothing is done at all. As he says, it’s important to be clear about these things, and it’s distressing that such clarity seems to be hard to come by.

Comments
6 comments so far

It seems like you’re mixing up your baselines here. The Obama bill will cut taxes for virtually everyone, including the well-to-do, compared with the current law — but the current law is an automatic tax increase on everybody. Since the Obama bill would reduce the rates in the lower few tax brackets, everyone with income in those brackets, including the wealthy, would see a cut.

But if you compare the Obama bill with the GOP’s preferred option, i.e. extension of ALL the tax cuts including the top two marginal rates, then upper-income folks do wind up losing out. You’re right that they don’t get hurt as much as you might think until you get into the million-dollar incomes, and some folks in the six-figure range may come out ahead under Obama’s plan.

But that’s because most estimates of Obama’s plan also include his proposed extension of the alternative minimum tax “patch,” which isn’t technically part of the Bush cuts and which helps those six-figure professional types the most. That’s really an independent issue, though — it’s hard to see Congress extending all the Bush cuts but letting the AMT patch expire.

So anyway, you should be clearer about what you’re comparing with what here, or things get pretty tangled up.

Posted by scarpy | Report as abusive

Come on now Felix…

You’re one of a handful of bloggers who are usually good at running some numbers. Assuming tax rates revert up by 3% on income over 250,000 than the tax increase on 750,000 above that benchmark is exactly $22,500. Not hard math. Are you (or anyone else) inferring that the presidents tax package will cut taxes on the first $250,000 of income by more than $22,500 to offset that difference.

Now I realize that the figures you quoted are from what should in theory be a respected source; but to quote a universilally hated past president… “I belive your figgers are inackerate.”

-y2kurtus

P.S. still longing for a peice on how Goldman can possible live without its sexiest business lines.

Posted by y2kurtus | Report as abusive

Sadly, much so called “independent” economics these days is actually partisan politics dressed up to steer innocent readers and even some analysts and commentators down blind alleys that always end up supporting the view of a politician or party.

Whatever happened to independent thought?

Posted by FifthDecade | Report as abusive

what wold be nice is to have several charts
show what is
and what would be under each scenario.

if that is tax savings
that jump at 200k should not be -
2000 savings should be the cap AFTER the economy gets better.

min wage earners / below ( who are not students) live in unsustainable poverty and need a bigger tax break now. BELOW AVERAGE INCOME earners should also get the loins share of the rest.

This is old info, but i doubt its changed-
The highest income earners typically put the least amount of income back into the USA economy where the lowest income earners spend all or mostly all in USA. So for more economic bang for the buck give more to the lower income people if you want to see it work in and for the USA.

Posted by macdoodle | Report as abusive

I think we need to move back to the tax rates we had before Reagan took office. The top bracket was 90%

Posted by STORYBURNthere | Report as abusive

I think the government should nationalize 25% of all domestic assets and use that to pay off the national debt.

Actually, I don’t. But it doesn’t seem any less confiscatory than a 90% income tax bracket.

Posted by TFF | Report as abusive
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