It all started on November 18, when The New York Times published an article by Nathaniel Popper and Nelson D. Schwarz headlined, Investors Rush to Beat Threat of Higher Taxes. Much of the discussion was about tax increases that would take place in 2013 if the fiscal
cliff curb is not averted, but the article quoted a woman in McLean, VA who is deeply concerned about what will become of her business if President Obama’s tax proposal is enacted.
Kristina Collins, a chiropractor in McLean, Va., said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.
Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.
“If we’re really close and it’s near the end-year, maybe we’ll just close down for a while and go on vacation,” she said.
Either Popper and Schwartz do not understand Obama’s proposal or they simply chose not to call Ms. Collins’ attention to her error–or perhaps they’re just media hacks. A number of bloggers responded with derision. Here’s Dave Wiegel:
How do you get to be as rich as the people in this New York Times story without ever figuring out how taxes work? [….]
You see these idiots every time a tax hike becomes possible again. They have no apparent idea how marginal rates work. Right now, if her and her husband make $250,000, they pay at most a 33% tax on some of that income. If they made $251,000, they would have to pay the same rates for everything except that last $1000 — that, they’d be taxed at 35%. If the rates increase across the board that top rate becomes 39.6%.
Derek Thompson argues that the NYT journalists should have at least gently explained to Collins that she was confused about the way tax rates work.
Kevin Drum provided a handy dandy tax table to help the “innumerate rich people” who are confused about marginal rates.
Their analysis is basically sound, except for the fact that it is not quite true. They have forgotten to look at deduction phaseouts, surtaxes, and the AMT, which are not taxes on marginal income.*
No matter what you have heard on the internet, there are in fact a lot of sizeable marginal inflection points for high earners. There are the Pease deduction phaseouts, temporarily abated by the Bush tax cuts but scheduled to go back into effect in 2013, which can eliminate up to 80% of deductions for couples who make more than about $175,000 (the number is indexed for inflation, so it changes every year): your deductions are reduced by 3% of the amount by which your income exceeds the threshhold. The student loan interest deduction phases out at $150,000 ($75,000 for singles). And a lot of tax-free savings opportunities disappear: educational savings accounts and IRAs have income limits, so your ability to use them starts phasing out in the low-six-figure income range. So do various educational and child tax credits. These things obviously aren’t a huge deal for people who make $1,000,000 a year but they can be a huge tax hit for couples in the $150,000 to $300,000 range. Come 2013, they will be an even bigger hit.
And we haven’t even discussed the AMT, which virtually eliminates deductions for couples who make the mistake of doing things like buying a house, having children, or living in a high tax state.
McArdle provided this chart:
I have to be honest, I’m not going to spend a lot of time worrying about people as wealthy as the ones McArdle is freaked out about. But in any case, Kevin Drum took note of the issue McArdle raised in a follow-up to his earlier post. He agreed that there are complex issues for people in the upper income brackets.
None of this really affects our discussion of people with incomes over $250,000, but it does illustrate the fact that moving across a phaseout line can sometimes have a significant effect on your taxes:
For example, a married couple filing jointly in 2013 with two kids at home and one in college who go from making $100,000 to $125,000 loses a $2,000 child tax credit and $1800 worth of HOPE credit, an increase of almost 4% in their effective—not marginal—tax rate. The marginal tax rate on their extra earnings is 15.2% just from deduction losses; that comes on top of the 28% they’ll be paying the federal government in income taxes, and whatever state income tax they owe.
I don’t have any real point to make here. I just wanted to acknowledge that my income tax chart only showed one piece of the picture. It’s the most important piece for most people who earn under $1 million (above that, investment taxes tend to become more important), but there are still plenty of little gotchas in the tax code that can have funny effects as they phase in and out.
Democrat and former Michael Dukakis campaign manager Susan Estrich is very upset that the presidential candidate whom she supported actually is intent on raising taxes on the rich — which, lo and behold, includes her. She complains: “I did not vote for Obama because I think I am paying too little in taxes. Like many people I know, I am ‘rich’ by Obama’s standards. I pay more taxes, percentage wise, than Mitt Romney and Warren Buffett, because I earn virtually every penny of my income. I work. And yes, all those deductions that allow the truly rich to not work, or at least to not work all the jobs I do, make me angry.”
She means she earns mostly ordinary income as opposed to capital gains, but you see her point — who the heck is Obama to tell a hardworking upper-middle class gal she’s not paying enough in taxes?!
I have no idea how much Susan Estrich earns, but if it’s all ordinary income, then she’d pay the same amount as before on the first $250,000, right? And she’d pay a few percentage points more on anything she earns over that amount. Big f&cking deal!
More from Rubin:
If you live in New York or Los Angeles and have an income of $250,000, two kids and a house in a nice but not ostentatious neighborhood, you are not living a lavish lifestyle and you already pay gobs and gobs in taxes. You didn’t inherit wealth and you worked hard in college and in your profession, only to find yourself living paycheck to paycheck. And now, you’re going to get socked with a tax hike.
Not if it’s all ordinary income (i.e., “paycheck to paycheck.”) And if a family with an income of $250,000 is living “paycheck to paycheck,” they need to work on a budget. I didn’t inherit wealth and I worked my ass off in college too. So did millions of other Americans. Big f&cking deal! If you need more, get a second job.
For years Republicans have been warning that the Obama-size of government will require much more than taxing the “rich.” That means not only the $250,000 earners (say, a white-collar professional with a mortgage, college tuition bills and a mother in long-term care) but the $80,000 earners (say a teacher in Massachusetts with a cramped condo, an old car and kids) also are going to be told they have to pay even more of their income to the federal government.
Newsflash for Rubin–you can do better than a cramped condo on $80,000 in Massachusetts–and that would be on the high end for a public school teacher. But Obama’s plan wouldn’t increase taxes on someone making $80,000 as salary income anyway.
To these whiny rich people and concern troll media hacks, I say tough shit! The average income in this country is a little over $50,000. Plenty of those people have parents in long term care–or are caring for them at home. And plenty of poor people have the same problems.
Obviously the White House needs to get busy educating the public as well as the lazy corporate media about how the tax system works and exactly what Obama’s tax proposals are. And hacks like Jennifer Rubin especially should be fired. As long as the Washington Post keeps this hack among hacks on staff, it cannot be considered a serious newspaper.
Feel free to use this as an open thread. I know most people are gearing up for Thanksgiving. I’m another one of those people who don’t really like the holidays.