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Home Publications Blogs Beat the Press The NYT Doesn't Understand Marginal Tax Rates

The NYT Doesn't Understand Marginal Tax Rates

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Sunday, 15 May 2011 07:43

The NYT ran a column asking whether people who make more than $250,000 are really rich. It told readers that the richest 2 percent of the population face money problems also, suggesting that those near this cutoff for tax increases by President Obama might be unfairly victimized.

The poster child for this story is a person named Mason, who live in Manhattan with 2 young children and reportedly makes $262,000 a year. Since the 3 percentage point increase in the tax rate would only apply to income above $250,000, or $12,000 of his income, Mason would have to pay an additional $400 a year in taxes.

This comes to approximately 0.16 percent of Mason's income. If he gets his entire income from working a 2000 hour year, then Mason will have to work about 3 more hours a year to cover this tax increase.

Comments (11)Add Comment
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written by fuller schmidt, May 15, 2011 8:48
Mason can't get to a sporting event for under $400 any longer.
AGI
written by jayackroyd, May 15, 2011 9:25
Actually, since he's probably citing his gross, he'd have no tax increase. After the mortgage on the condo, and the three dependents, his AGI would be well under 250K
round = arbitrary
written by Glenn, May 15, 2011 9:55
I love the comment in that story about how the "round" nature of $250,000 "suggests that it's arbitrary." Is there a non-arbitrary way to set tax brackets and tax rates?
. . .
written by QuentinCompson, Negatory, May 15, 2011 10:03
Math has a liberal bias.
-
AGI: not really
written by Downpuppy, May 15, 2011 12:27
The mortgage interest & state tax deductions are between AGI & taxable income. The AGI might well be $262, but the taxable would be closer to $200k.

So they'd most likely be in AMT, & the whole thing is even more pontless.
Why only one additional bracket?
written by techietype, May 15, 2011 12:58
Actually, there is a point to be made here. People earning $250,000 are clearly not in the same league with people earning $1 million. Those earning a $1 million are not in the same league as those earning $10 million, let alone more.

It makes sense that there should be a series of progressively higher tax bracket. Perhaps that series should even start at $100,000.

Yes, there certainly are examples of government spending that can be parred back. But when police officers in major cities are getting laid off as crime rises, and we cannot afford to help the sick, it's also clear that government does not have enough money.
...
written by scottinnj, May 15, 2011 2:12
I think downpuppy is on the right track. My situation isn't that different that said Mason (except I'm in NJ) and because of the AMT the expiration of the bush tax cuts is essentially moot. Basically if you are a homeowner in a high income/high property tax state and over the AMT thresholds the bush tax cut extension debate is irrelevant to you.
Thanks Downpuppy
written by jayackroyd, May 15, 2011 2:34
Thanks for the correction.
It's not merely this column in the NYT: Marginal tax rates are systematically ignored / lied about
written by El Cid, May 15, 2011 3:47
I've listened to discussions of tax rates among colleagues, talk radio, read columns and such, watched politicians harangue.

And it's almost always based on the ignorant or, quite commonly, falsified implication that once some limit is reached, the higher tax rate applies to the whole.

I.e., 'if I make $500K then suddenly they're going to take 50% [or whatever the terror figure used] away! I might as well not work! I have no incentive for excellence!'

If you point out how marginal tax rates work, and how they know this very well when they pay their own taxes, or they ought to, or if they have the slightest interest in looking something up, it's either dismissed as irrelevant or some sort of liberal misunderstanding.

If you point out how many ways those who were once taxed at 90% marginal income avoided paying that amount, and why it made some sense to reform that number down while increasing collection, then it's still dismissed as robbing people who are successful.

In fact, the current Congress and Republican politicians oppose funding the IRS in making sure it's collecting from current taxes.

You know, because it's simply immoral to collect income taxes from people with money, and it's probably better to ignore the whole idea that a government of the nation with the richest and largest economy ever known needs revenues, and just keep screaming about high taxes and deficits and debts.
Tax deductions
written by Michael Sullivan, May 16, 2011 2:55
One thing that I rarely see mentioned in discussions of the "not rich" family making 250-400k in New York or San Francisco or whether living expenses are very high is that deductions tend to be greater for people living in exactly these areas. State and local Income taxes in Manhattan are very high, and these taxes are deducted from your federal taxable income. Real estate is incredibly expensive in these locations, and mortgage interest is... wait for it ... deductible.

If I lived in NYC, and made enough to be comparably well off as now, I would expect to have taxable income around 1/2 or less of my gross. After mortgage and property tax payments on a condo/coop, state tax and local tax deductions.

The plan Obama went in with 3 years ago, involved fixing the AMT so that families in the range discussed were much less likely to get hit with it. And for someone making 300k in a very high cost locale, it is much more likely that they heavy deductions cause them to pay AMT, than that their taxable income is over 250k.

A plan that raised AMT thresholds but put in a 250k bracket of +3% would probably cause most of the people making 3-400k in expensive cities to *save* tax, not pay more. The people who would pay more are the people who are making that kind of money in cheaper places with fewer deductions.
...
written by urban legend, May 16, 2011 3:44
Why is it that liberal bloggers, who ought to have some modicum of understanding as to what a persuasive argument is, routinely fail to point out in the loudest and clearest terms that when we talk about people with taxable incomes of $250,000, we are talking about people who most likely "make" -- before exemptions, tax-exempt income and deductions -- somewhere between $400,000 and $500,000 a year??? Dean is guilty, as is Brad Delong, Mark Thoma, Paul Krugman and others who abjectly who let Republicans frame the argument on this issue. As others have wisely noted earlier, it's TAXABLE-FRICKIN'- INCOME that higher top marginal rates will apply to. You can't apply a rate to gross or adjusted gross income, and people with $250 K in taxable income are doing very, very, very well.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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