Nate Silver Comes Through on Taxes

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Tuesday, 27 November 2012 04:48

Both the NYT and Washington Post reported on a tax proposal from Republicans which could lead to a large tax increase on the slightly rich, while leaving the very rich little affected. The proposal would have the lower tax brackets (e.g. the 10 percent rate on the first $20,000 of income and the 15 percent rate on income between $20,000 and $70,000) phased out for households with incomes above $250,000.

Remarkably, neither paper pointed out to readers that this proposal would imply a substantial increase in marginal tax rates for those in income range where these lower tax rates were being phased out. This omission was striking both because of the policy and political implications of the proposal.

On the policy side it would mean that most of the people seeing higher tax rates would be subject to a higher marginal tax rate. (The phase out of the lower brackets is the same thing as a higher marginal tax rate.) While neither article mentioned the range over which the phase out would occur, the vast majority of the people over the $250,000 threshold earn an amount near this threshold. This means that if the phase out ended at $750,000, or even $500,000, most of the people facing tax increases would be in the bubble range facing the higher marginal tax rate.

Insofar as we are concerned about the disincentive of higher marginal tax rates, we should want to see as few people as possible subject to higher rates. This policy would cause a large number of the slightly wealthy to face a higher marginal tax rate.

The politics of this proposal are even more striking. The Republicans had highlighted the fate of small business owners who they like to call "job creators." This policy would imply a higher tax rate on the vast majority of the job creators, while leaving the very rich little affected, since their income would place them well above the bubble cutoff. This proposal would seem to imply that the Republicans were willing to nail the job creators to benefit the very wealthy.

Readers of the NYT and Post might have missed this basic fact, but fortunately Nate Silver came to the rescue. He carefully explained the basic story to readers in his blog this morning.