Obama’s tax cut for the rich

By Felix Salmon
September 30, 2010
Jonathan Chait, for making an important point about the NYT's silly story today on the subject of taxes and "the definition of rich".


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Thank you, Jonathan Chait, for making an important point about the NYT’s silly story today on the subject of taxes and “the definition of rich”.

The Times article starts off by asking “whether a person who earns more than $200,000 a year should be taxed at rates similar to those who make $5 million”, and continues:

Others in Congress have questioned why ending what Mr. Obama frequently calls “tax cuts for millionaires and billionaires” should also raise taxes on families making $250,000…

In some expensive sections of the country, many families with income levels near the $250,000 cutoff insist that they have more in common with middle-class Americans than millionaires or billionaires.

Let’s put to one side the fraught question of whether a $250,000 income makes you rich. That’s a question of judgment, while there are basic empirical reasons why the NYT’s angle here is fundamentally flawed. As Chait explains:

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 taxed at the top rate.

This actually understates the matter. For one thing, we’re talking taxable income, here — so you can automatically exclude 401(k) contributions, charitable contributions, mortgage-interest payments, and all manner of other deductions.

On top of that, everybody earning more than $250,000 gets the full value of all the tax cuts for everybody earning less than that. Take Chait’s example of someone earning $300,000: they might pay a higher tax rate on the last $50,000 of their income, but they will also pay a lower tax rate on the first $250,000. As a result, their overall tax bill will go down, rather than up.

So when the NYT’s David Kocieniewski starts talking about “many families with income levels near the $250,000 cutoff”, he’s making a serious error. If you’re anywhere near that cutoff, your tax bill is set to go down, even as the tax bills for those millionaires and billionaires are set to go up.

The clear implication of Kocieniewski’s article is that the rich middle classes — “a couple in Westchester County, a police officer with a lot of overtime and a principal at a public school”, say — are going to suffer the same tax hike as millionaires and billionaires. And that simply isn’t true, even if they’re making significantly more than $250,000 between them.

Comments
14 comments so far

This is a mathematically challenged nation, and you’re expecting way too much if you think most people can follow that (what should be simple) math, even high school principals. It’s a lot less work to not do the math and get angry at somebody.

The debate shouldn’t even be aboout who is “rich”, but rather who can afford to pay more than others. A 3% increase in taxes is more easily absorbed on incomes above $250K than it is on those below that threshold.

Posted by OnTheTimes | Report as abusive

I am 22, an accounting student, and soon-to-be CPA. I die a little inside whenever $250k-er says they’re going to be taxed like a billionare. Progressive tax rate structure – google it, please.

Posted by asimmo6 | Report as abusive

Honestly, if more people would just go through the forms, do their own taxes and look at the progressive tax they would have a better understanding of what it entails.

It isn’t rocket science! Of course you can also use a service or a program, but do it yourself as well to get a better understanding of your taxes and what your deductibles are and at least understand what progressive taxes mean to you each year and understand the steps to take to reduce it when you can.

In other words, know what taxable income means and know what yours is.
http://blogs.reuters.com/felix-salmon/20 10/09/20/the-whining-rich/

Todd Henderson would have saved himself a lot of headaches…

Posted by hsvkitty | Report as abusive

Isn’t the effect further reduced as with the higher tax rates – assuming everything else stays the same – the difference between intermediate calculation steps for ‘normal’ vs ‘AMT’ is reduced and therefore the increase in contribution of the tax coming from ‘normal’ is at least partially offset by reduction of the ‘AMT’ part.

Posted by nycbert | Report as abusive

why don’t we just put in more marginal tax brackets at higher income levels as well – and avoid the issue alltogether?

Posted by KidDynamite | Report as abusive

It seems to me that this entire debate has been poisoned by the political rhetoric that equates rich with high income (however both terms might be defined). I think Fortune’s Shawn Tully captures that distinction well with his HENRY (high income, not rich yet) acroynm. You might argue that a high earned income will translate to rich sooner or later, but there are a lot of confounding variables. And since investment income (so-called unearned) is often taxed at a lower rate, we are missing an entire category of rich.

Posted by Curmudgeon | Report as abusive

I think the point is that 300K being earned by a couple working 80 hours a week combined is not the same as 300K on 40 hours a week. A tax system that equates them is idiotic.

Posted by maynardGkeynes | Report as abusive

Holy crow, the other article in that “debate” was even more ridiculous. Trickle down theory… my gluteus maximus…

http://www.nytimes.com/roomfordebate/201 0/09/27/tax-cuts-the-trickle-down-argume nt

Posted by hsvkitty | Report as abusive

There’s a fundamental point about tax rates that is often overlooked — the rate does not matter for the super rich whose wealth is mostly in appreciated securities. They are not taxed at all until sale, but can borrow against the securities and spend the proceeds tax-free.

So the rate could be 100% and Warren Buffett, Bill Gates and Page & Brin won’t pay any appreciable amount of additional tax. These guys can borrow against their holdings (at 3% interest rates) indefinitely without paying any tax. In fact, Larry Ellison famously borrowed $1 billion against his Oracle stock.

The only way to level the playing field and tax the economic income of investors on a par with wage earners is to impose a mark-to-market tax on the publicly-traded securities of the super wealthy (say $5 million or more of investable assets).

For more on this see http://www.cadwalader.com/assets/article  /120505MillerTaxNotes.pdf and http://govinfo.library.unt.edu/taxreform panel/meetings/docs/miller_052005.ppt

Posted by comment1 | Report as abusive

Felix,

You’re a great finance writer… the best in my opnion. But I will say again that it is not your writing that draws in most of your readers… it’s your willingness to get your hands dirty and crunch some numbers that seperates you from the pack.

Crunch some numbers on what you wrote… “Take Chait’s example of someone earning $300,000: they might pay a higher tax rate on the last $50,000 of their income, but they will also pay a lower tax rate on the first $250,000. As a result, their overall tax bill will go down, rather than up.”

So lets test that… $50,000 of income is taxed at a 4% higher rate… so that’s a very modest $2000 tax increase for someone making 300,000.

The issue I have is that this is NOT going to be offset by the lower tax rate on earnings below $250,000 when compared to current 2009 tax law.

The $2,000 increase is exactly that… it’s a tax increase and that is the net number for someone making $300,000.

Put another way, Obama is NOT proposing a tax break for someone making exactly $250,000… he is proposing that current law be extended and that they be taxed exactly the same in 2011 as they are in 2010. How you can call that a tax break is beyond me.

I for one would like to see higher sin taxes, higer gas taxes, and perhaps even a tax on consumption… start with a national sales tax on all non food items at 5%. Force all funds to flow into 401k style individual accounts via an expansion of the earned income credit.

Keep up the great writing

Posted by y2kurtus | Report as abusive

y2kurtus-

The comparison should not be between 2010 and 2011; the comparison should be between 2011 under current law and 2011 after Obama’s proposed changes. Obama is proposing a tax cut to partially offset the tax increases Bush signed years ago. The Republicans are proposing a tax cut to completely offset those tax increases. Neither is proposing spending cuts to offset the revenue loss.

Posted by MattJ | Report as abusive

@y2kurtus and MattJ: Both represent legitimate ways of looking at the situation. But from the standpoint of the average taxpayer, it will feel like a tax increase, because their paychecks today will be smaller than their paychecks were yesterday. Don’t try to tell the taxpayer that their taxes will be the same as nine years ago, because their financial situation was likely very different (for better or worse) at that time.

Posted by Curmudgeon | Report as abusive

Many aspects of the income tax system ARE indexed to the CPI, including the tax thresholds and the standard deduction.

A tax increase doesn’t necessarily mean that the government is becoming less efficient. Sometimes it simply means that the government is borrowing less money to provide the same services at the same cost. The Bush tax cuts were never matched by spending cuts, thus their reversal should not be matched by spending increases.

Posted by TFF | Report as abusive

Everyone (and I mean everyone) should read the book “The Trouble with Billionaires”. I won’t explain…just read it.

Posted by gascar | Report as abusive
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