Bailout

Obama?s tax cut for the rich

By Felix Salmon

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.

Full post as published by Macroprudential on September 30, 2010 (boomark / email).