TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

A Member of the Law Professor Blogs Network

Wednesday, November 21, 2012

The New York Times Doesn't Understand Marginal Tax Rates

New York Times:  Investors Rush to Beat Threat of Higher Taxes:

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.

Huffington Post:  The New York Times Reporters Do Not Understand How Marginal Tax Rates Work:

For whatever reason, an article titled Investors Rush to Beat Threat of Higher Taxes was published by The New York Times despite the fact that it contains a galling bit of stupidity, which could spread like a supervirus to the general public. ...

This is a stupidity as persistent as it is avoidable. Ms. Collins, chiropractor from Virginia, is among the many people of affluence who have somehow survived without understanding how marginal tax rates work. As always, I am obligated to provide the following paragraph from Dean Baker's post, "Marginal Tax Rates: How To Explain Them To A Five-Year-Old Child" (not its actual title, but still):

The tax system brackets give marginal rates. This means that if the raise bumps you into a higher bracket then you pay more taxes only on the income in the higher bracket. Suppose that the tax bracket for income under $200k is 25 percent, and for income over $200k is 33%. If you get a raise that pushes your income from $195,000 to $205,000 then you only pay the higher 33% tax rate on the $5,000 that is above the $200k threshold not your whole income. Therefore, there is no (as in none, nada, not any) way that getting more money, and being pushed into a higher tax bracket will leave you with less money after taxes.

Reporters, when they come across someone in the wild who clearly does not understand how marginal tax rates work, are obligated to explain to such people that they are incorrect, and should never spread their ignorance to their readers ... -- [T]here are not "two sides" to this issue. You either understand how marginal tax rates work, or you do not, and reporters are absolutely allowed to point out who is right and who is wrong.

Visit NBCNews.com for breaking news, world news, and news about the economy

(Hat Tip: Linda Galler, Francine Lipman.)

Update #1:  The Daily Beast, Should People Who Make $250,000 a Year Worry About Obama's Tax Proposals?, by Megan McArdle:

Kevin Drum and Dave Weigel take off after rich people who don't understand that they only pay marginal tax rates on the extra dollars they earn above taxation thresholds. "This isn't true, of course. Obama is only proposing to raise tax rates on income over $250,000, so if your income goes up to $251,000, you only pay the higher rate on the extra $1,000. The tax bill on your first $250,000 stays exactly the same."

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....

I've put together a handy graphic showing you what income levels trigger deduction phaseouts or surtaxes. The red line shows you where the phaseout is complete--i.e., where the deduction completely disappears.

file

Update #2Glenn Reynolds (Tennessee):

In today’s freelance economy, will the impact of marginal rates on how hard people work be greater than in the past? I mean, if you have an old-fashioned full-time “job” paying X-dollars a year, you can’t easily cut back and lower your income. But if you’re a freelancer of some kind, it’s easy to say that once you’re paying 50% (or 40%) tax on your income you’d rather cut back and substitute more leisure time. With more people earning their living that way, and fewer in full-time jobs, I assume we’ll see a lot more of that than we would have, say, 20 or 30 years ago.

http://taxprof.typepad.com/taxprof_blog/2012/11/new-york.html

Tax | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341c4eab53ef017d3e069a7b970c

Listed below are links to weblogs that reference The New York Times Doesn't Understand Marginal Tax Rates:

Comments

Am I wrong in thinking that this argument does not apply to welfare benefits, which DO have a cutoff threshold that can result in a person's marginal tax rate exceeding 100% if she should be dumb enough to take a job??

Posted by: Jimbino | Nov 21, 2012 3:03:10 PM

Obviously they do not understand that the extra work to earn that additional money is not worth the effort for that couple. Yet they might consider the effort if the rate of return was higher [ie lower tax rate]

Posted by: DrP | Nov 21, 2012 3:11:48 PM

Does the argument still water when phase-out of deductions and credits and the AMT is considered? I assume it does, but I've never run the math.

Posted by: Devil's Advocate | Nov 21, 2012 3:13:39 PM

Megan McArdle comments and says of the various people critiquing the subjects of that article, "Their analysis is basically sound, except for the fact that it is not quite true." She has several follow-on posts.

What it boils down to is that HuffPo doesn't understand how tax inflection points and deduction phase-outs work.

Posted by: Shelby | Nov 21, 2012 3:16:46 PM

Higher marginal rates may tip the incentive balance in the 'work more or take a vacation" equation.

Posted by: Woody | Nov 21, 2012 3:18:10 PM

Being pushed into a higher bracket does not mean you'll have less aggregate left over after Uncle is through with you. It does, however, mean that the last couple of weeks' work in a year might be less rewarding and so...start slacking off after Thanksgiving.

Posted by: Richard Aubrey | Nov 21, 2012 3:20:07 PM

There are some expiring tax provisions that don't quite work this way, though. There's a host of other phaseouts, both at the lower and higher income levels. There's a lot near the $150k-$250k range, but there's also a lot at lower levels. Some of them do combine to push marginal tax rates up quite a bit at certain points, though the marginal tax rate certainly does not exceed 100% over any large range, even if it might over very small $1 ranges at some places (have to check). There is a very small percentage of low income households that faces marginal tax rates over 80% currently, according to the CBO.

I also wonder if the Pease limitations on itemized deductions would be indexed in a different way to avoid hitting people making from roughly $177.5k to $250k (joint), in some deal.

Posted by: John Thacker | Nov 21, 2012 3:23:46 PM

How does this square with Megan McArdle's article:

Excerpt: "A couple that goes from $180,000 to $251,000, meanwhile, loses access to Coverdell Education Savings Accounts and the adoption tax credit, loses $2250 worth of deductions under the Pease rules, almost certainly pays AMT, and has any investment income hit with a 3.8% surtax. Under Obama's plan, it's true that the top marginal tax rate will only affect about $1,000 worth of their income. But the other tax law changes that have occurred (or will) under his administration make for a sizeable increase in their overall tax burden. At the margin, this couple is probably better off earning the extra money. But there will couples who will not be--and a number of couples who will have to think hard about whether it wouldn't be better to cut back on the high-stress job. "

Posted by: AliceH | Nov 21, 2012 3:26:29 PM

"Person of affluence"

Is that like a "person of color", a passive-voice construct that implies a condition over which you have no control?

IOW, "you didn't build that".

Posted by: ExNavyDoc | Nov 21, 2012 3:30:23 PM

I could be wrong, but maybe Ms. Maddow misunderstands that working your tail off for 75 cents on the dollar is worth it, but putting effort in to make 65 cents on the dollar is not. Maybe these chiropractors really do understand marginal rates after all.

Posted by: rearadmir0l | Nov 21, 2012 3:30:45 PM

ah, come on ... they're "rich", they can "afford" to support more of the 47% with their effort ... its only "fair" after all ...

Posted by: JeffC | Nov 21, 2012 3:37:07 PM

Nowhere does Ms Collins state or imply that she will get less income. I read this as not wanting to get to that next bracket where additional work does pay less for each dollar earned above the threshold. That is the point - additional work is disincentivized. Anyone on the edge of the highest brackets is quite aware that their last dollar is taxed at 40-50% and may not be worth earning. If you are under 100K or over 300K* it is not such a big deal, but the value of additional work if you are between these amounts, especially if you get paid hourly or can work paid overtime, is definitely something to consider. I have refused extra time because 40% was going straight to government.

*The amounts are somewhat arbitrary. Under 100K most people are just interested in earning more income. Over 300K and you already have so many dollars earned at the highest marginal rate that the next dollar is of equal value to you and you might as well earn it.

Posted by: Peakview28 | Nov 21, 2012 3:39:22 PM

Clearly my (FIRST EVER) comment was composed prior to the update. That'll teach me.

Posted by: AliceH | Nov 21, 2012 3:46:18 PM

All it means is that the more you contribute the less you benefit.

Posted by: PacRim Jim | Nov 21, 2012 3:52:42 PM

Taxes change incentives... normally, at Christmas, I donate 5-6k (in addition to church giving/child sponsorship)... but I'm realizing that government should be in charge of charity as a liberal (who gives nothing) reported to me... it's only fair that everyone give, or no one... well... okay...

Sorry Sandy victims, Salvation Army, Toys for Tots, Samaritan's Purse, Fisher House, World Help and the CFC... I have to kick in more for taxes because government is a better steward of my money than I am...

I surrender... I will look out for number 1...

Sad, because I am now afraid to meet my maker... what did you do?... I spread the gospel while helping poor people... now... it will be I paid taxes... I doubt God will look favorably on my future good deeds... talk about conflicted.

Posted by: Steve | Nov 21, 2012 4:24:13 PM

"Reporters, when they come across someone in the wild who clearly does not understand how marginal tax rates work are obligated to explain to such people that they are incorrect, and should never spread their ignorance to their readers"

Interesting. I assume that they would also say that reporters should explain other mistaken notions to "someone in the wild," such as the Bush tax cuts were only for the rich, ...and I'm sure your readers can come up with more items that reporters should explain because there are not "two sides" to the issue.

Posted by: Tim | Nov 21, 2012 4:29:49 PM

>"Reporters, when they come across someone in the wild who clearly does not understand how marginal tax rates work, are obligated to explain to such people that they are incorrect, and should never spread their ignorance to their readers."

Wow! Just too funny. Reporters are especially known for being clueless when it comes to technical subjects that utilize math and statistics--whether medical or academic studies, or the tax code. The only "code" reporters appear to know, are code words used by the racists lurking around every corner.

Posted by: Forbes | Nov 21, 2012 4:31:29 PM

This is exactly the same principle as hiring sales people. If you want people to sell more, you incent them with MORE money through higher commissions as they sell more, not less. Even a straight commission will work, but not as well as increasing commission percentages.

The same thing is true with taxes. Lowering tax rates the more money people make will generate MORE taxable income and more tax collections. Even a flat tax of say 15-20% would be better than the Marxist "progressive" tax rates. But that's just not something jealous people can tolerate.

Posted by: Concerned Citizen | Nov 21, 2012 4:34:08 PM

First Weigel. James Clyburn said you are using dog whistle stuff how does it color the debate. Shape up!

Second. NYT, where have you been hiding Walter Duranty, I thought he passed on long ago..

Posted by: JP | Nov 21, 2012 4:39:52 PM

Where it hits the hardest, as mentioned above, is in the ~$120k-$180k income range. As you go from earning $130k to, say, $160k, and you're married, have a couple kids, maybe a rental property or two, you can easily see 60%+ marginal rates + state tax rates.

I would suggest getting TurboTax and playing around with it. It's quite easy to have a situation (maybe resembling mine) where your earnings go from $130 to $160k, and because of the phaseout of the child tax credit etc, end up with paying $19,000 in incremental taxes on the incremental $30,000 in income.

Posted by: David | Nov 21, 2012 4:55:06 PM

I agree, it's not at all clear the subject of the interview was misunderstanding anything. She might just be saying, "It's not worth the opportunity cost to do that additional work when the tax on those additional dollars is so high."

That's exactly the kind of prudent marginal thinking an economist or financial analyst would expect a rational person to make, and nothing about the quote indicates the chiropractor was thinking anything else ... only if you go into that quote loaded with biases, looking for that mysterious reason some other person doesn't wholeheartedly agree with you.

Posted by: KevinF | Nov 21, 2012 5:18:31 PM

Keep 60 cents of your next dollar earned? I wish. If we have the new 40% marginal Federal rate, you need to add in the new California marginal rate of 13%, plus the new California sales tax of near 9% if you actually want to, you know, spend and enjoy that extra money instead of just put it in the bank to earn 0.2% APY, or buy stocks and prop up the Recovery Is Just Around The Corner Bernanke/Obama money-printing Ponzi.

So...that means if I do an extra $1 worth of work, I am actually paid 38 cents. Or to put it another way, this tax hike basically lowers the cost to me (in foregone future spending) of not doing work. So of course it strongly incentivizes leisure.

Look at it this way. If I have an hour of time, and can choose to spend it working or goofing off, the Bush Administration told me goofing off would cost me about $50 in lost income -- money I would not have to spend later. The Obama Administration has just suggested they want to change the rules, so that spending an hour goofing off will now only cost me $38 in lost income.

I'd be a fool not to pay attention to those incentives. What's a mystery is why the dummies at the White House want to set them up that way. I thought the problem was too little work going on. (There's no mystery about why journomorons like Kevin Drum think it should work differently; journalism is what you go into when algebra is too hard.)

Posted by: Carl Pham | Nov 21, 2012 5:28:19 PM

The problem with today's tax code is that the answer to nearly any wholly legitimate point anyone makes will start with, "Yeah, but..."

The tax code is far, far, FAAAARRRRR too complicated!!

Posted by: Jon | Nov 21, 2012 5:36:06 PM

Um... I'll remember this guidance when my tax lady says: you hit the AMT threshold.

Posted by: egoist | Nov 21, 2012 5:47:21 PM

No doubt the New York Times reporter doesn't understand marginal rates, but I'm not so sure the Collins misunderstand. They sound like a Swedish friend of mine in the early 80's. He took a three month vacation because the marginal rate was so high it wasn't worth his effort to work the additional time.

In my family's case I work and my wife chooses to work or not. When she chooses to work, her first dollar is essentially taxed at the highest marginal rate my last dollar is taxed. For us that point is 25%. With state tax and social security she loses at least 36% of her first dollar. Pretty big disincentive. If the Collins view Kristina's work as nice to have it would be rational for her to view higher marginal rates mostly affecting her efforts and thus being a very big deal whether it would be worth her time to work with the higher rates.

Posted by: Dave | Nov 21, 2012 5:51:45 PM

So I make over $100 an hour and I am going to quit working hard if they take 30 to 40% of my income in taxes....hmmmmmm......I would think you would only lose incentive if taxes were over 50%....I know I would work hard up until Uncle Same takes over 50% ...

Obviously none of these people ever grew up poor and had to work for $1 an hour. So they are very picky on how much they work.

Posted by: Sid | Nov 21, 2012 6:02:54 PM

Clearly ms. maddow, and the left in general, has no understanding of the economic concept of marginal. It means "next", or additional. And that's the problem. The left is imbued with this notion (static analysis) that whatever you are doing, A, B, and C, you'll keep doing exactly the same if you tax it 10% more. So, they figure that they'll get 10% more tax revenue from A, B, and C. All they need to do is see California to get a dose of reality. (Not that it has taught the morons in Sacramento anything!!)

Marginal income, in other words, each successive amount earned (from another sale, another day at the office, etc.) comes at a higher marginal cost. It's a law, called increasing opportunity cost, and it is true everywhere, all the time. It's also known alternatively as the law of diminishing marginal returns. The left hasn't even the most rudimentary understanding of economics, and this nonsense only proves the point. The fact is this, that absolutely people will simply not work as much.

Sure, they'll say "you're still earning more", or might even say "it's not really that much more in taxes", but the fact remains the returns are less, the costs are greater. At some point it's simply not worth it. And there's simply no way to predict when, who, how much, etc. You can't. They'll base their tax revenues and spending projections on models which show no changes and then act indignant when it fails to materialize.

Maybe obama was right, at some point you have earned enough money :) :)

Posted by: Rob Mandel | Nov 21, 2012 6:27:10 PM

Sid, what you "know" and what others know seems to differ.

Posted by: SPQR | Nov 21, 2012 6:31:29 PM

Jason Linkins, the Huffington Post writer, needs to be careful about calling other people stupid, especially when he has his facts wrong. The true marginal rate is almost never equal to the statutory marginal rate. There always seem to be one or more phaseouts in play. True marginal rates in excess of 50% are common. They can even exceed 100% in rare cases. The only way to know for sure is to run TurboTax at one income level, then add or subtract $1000 to your income and see how much your tax liability changes.

Personally I'd be thrilled to have my total tax liability (state plus federal) increase only $500 per $1000 of additional income, and I am nowhere near Obama's definition of rich. I won't call him stupid, but Linkins need to become less ignorant about income taxes.

Posted by: AMTbuff | Nov 21, 2012 7:10:31 PM

SPQR

It seems you are one of those who wants to pay the lowest taxes and gives up income ....good luck on getting rich or are you already rich and are so concerned about his tax rate that forgets the objective....making money....

Posted by: Sid | Nov 21, 2012 7:58:41 PM

Investment income/ return on savings is ALWAYS taxed at the marginal income rate.

It's the impact on the nation's Investment Capital that makes high marginal tax rates so ruinous.

The tandem partner to high tax rates on investment income is politically directed priorities: tax shelters for those who 'do the right thing.'

To waste any intellectual energy debating wage earning behavior is the worst sort of mis-direction.

=======

Never mentioned by Marxists, the reason that the top tier income earners has such a high percentage of investment income is because they saved and invested to get it.

Proof comes by way of lottery jackpot winners. With almost no exceptions -- they're broke within two years -- almost without regard for how much they've won.

It's the hanging-on-to-wealth that's tough to do.

This explains why the crooks of Goodfellas infame stayed stunningly broke. Even though they stole fortunes -- they spent it as fast as they stole!

So, high marginal rates means that the nations investment capital moves from private hands to government -- which spends like gangsters -- but for a good purpose.

Posted by: blert | Nov 21, 2012 8:11:04 PM

Another thing a lot of people who argue that high marginal rates aren't a real problem because they are "just marginal" is the issue of dual-income couples. Having both members in the formal workforce typically causes them to incur many additional costs - childcare, cleaners, additional commuting costs, etc., that they would not have if only one worked. Add onto this a high marginal tax rate, and a lot of couples will decide that the second income provides little if any value. Then the government loses not only the taxes from the second income, but the taxes from all the other people they would have employed.

Governments have become highly dependent on the tax take from high-income dual-income couples. They are very much in danger of killing this golden goose.

Posted by: Curt | Nov 21, 2012 8:40:46 PM

Alternative Headline: Democrats with Bylines Desperately Try to Convince Productive Members of the Welfare State to Keep Working

Posted by: Vercingetorix | Nov 21, 2012 8:45:28 PM

Clearly none of the comentators do tax returns or run numbers and clearly the idiot in the article has not looked at the situation Put it in your Turbo tax...Assume wages of 250000, dividends of 20000, cap gain of 21000 and other income of 7000...a total income of 298000. Assume itemized ductions of 30100 and a married couple. Taxable income of 259000 for a tax of 59310, AMT 379 and a total tax of 59689. In the 33% bracket with an effective tax rate of 19.9% add in CA taxes and you get additional tax of 20118 for a total of 79807 in a total CA and Fed tax without taking into account SS and medicare...Total effective tax rate of 26.7%........So this couple is so picky it does not want to pay over 26.7% ....it will basically give away the other 74%.....now lets do it with wages of $400,000 an increase of 150000. Tax of 108997 + AMT of 3192= a tax 112189, marginal rate of 35% and effective tax rate of 24.33%...now lets add in CA taxes of 34709 and we have an effective tax rate of 32.7% without social security and medicare...Again why would you not make the extra 150000 if you put away 67% of your earnings in the bank.....?

Posted by: Sid | Nov 21, 2012 8:57:08 PM

Everyone is missing the real point of the NYT story...which is, chiropractors do not give a damn about their patients, it is all about making money, whether they understand marginal rates or not.

Posted by: Hedge | Nov 21, 2012 10:40:43 PM

I seem to recall that Obamacare has some pretty steep cutoffs for exchange insurance subsidies:

According to this article:

http://www.obamacarewatch.org/primer/exchanges-and-premium-subsidies

"For instance, at 150 percent of FPL in 2014, ObamaCare limits the amount that such households must contribute toward their health insurance premium to 4 percent of their annual income. At 400 percent of the FPL, households must contribute 9.5 percent of their income toward insurance premiums."

According to this site:

http://www.creators.com/opinion/terence-jeffrey/obamacare-puts-families-making-192-920-on-welfare.html

"For a family of four — mom, dad and two children — the poverty level is $22,050, and the upper income for getting federal health insurance subsidies would be $88,200."

If I understand correctly, this is a brick wall. If you make $88,200, a family of 4 would pay $8379 ($88200 * .095) to ensure all 4 family members. If the family makes $88201, they lose this subsidy and have to pay full price, which according to this article:

http://money.cnn.com/2011/05/11/news/economy/healthcare_costs_family/index.htm

might typically be $19393.

So, if I understand this correctly, making $1 in additional income causes the loss of an $11014 subsidy. Quite a non-marginal tax shelf.

Posted by: jms | Nov 21, 2012 11:21:24 PM

Sid: Effective rates don't provide the proper comparison. In your example (assuming your numbers are correct), that extra $150K in income is charged over $67K in taxes, or just under 45%. Second, why doesn't Medicare count? That increases the tax rate on the extra $150K to over 46%.

Instead of keeping 67% of the extra $150K, the couple keeps a little over half and incurs (a lot of) extra work to make that money. It's naive to say that the couple is "basically giv[ing] away" the money. It's not like people are choosing to make $250K instead of $400K *for the same amount of work* in order to stick it to Obama.

Maybe instead of working 60-hour weeks to earn the $400K, the couple decides to work 40-hour weeks to make $250K and spend more time with family, hobbies, vacations, etc. Or take November and December off, and defer the same work to January and February for a higher return. Certainly doesn't look idiotic to me.

Posted by: Greg | Nov 22, 2012 12:09:23 AM

The chiropractor's comments are quite typical of the affluent, and this part is quite telling: "Ms. Collins said she felt torn by being near the cutoff line...". What the Huffpo doesn't understand is the psychology of demonization. People don't want to be counted among "those people", the rich few. People will choose not to earn enough to cross the line simply for the peace of mind of not being targeted. The affluent can afford not to work, so they are particularly sensitive to social signals to stop doing what they're doing.

There was a famous example in the 80s (or early 90s) of a tax on the purchase of new yachts. The idea was that rich people would barely notice the small change in the price of their toys. What the promoters of the tax failed to realize was that the rich people whom they wanted to target didn't like being targeted, period, and they promptly stopped buying yachts. Numerous American boatyards went under, thousands of productive Americans lost their jobs, and such revival of boatmaking in America as has occurred lately has come from European boatmakers moving into the vacuum.

Posted by: Kristo Miettinen | Nov 22, 2012 2:19:07 AM

News flash for Sid... and others...

High income earners don't work 40-hour weeks, far from it.

Such marginal income comes at the cost of 'over-time' efforts.

Speaking of which, even for low wage, blue collar employees, I've personally seen -- countless times -- employees turn down time and a half wages -- that wouldn't remotely come close to top tax rates -- because the government's take was too much for them to bear versus spending time with the family.

As one wealthy banker put it: I was shocked when my son left me out of his drawing of our family.

Posted by: blert | Nov 22, 2012 4:01:10 AM

Can anyone address a simple observation that Obama continues to inflict a "marriage penalty" by using $200,000 for all of these provisions for unmarried (including co-habitating couples) while only $250,000 for those of us who choose to married and both work? Why is it not $400,000?

Posted by: TaxesProf | Nov 22, 2012 9:34:11 AM

The argument that people's decisions about work aren't affected by taxes don't make sense to me. In my experience, even people with low rates avoid taxes. Many people I have tried to employ -- house cleaners, handymen, golf pros, manicurists, etc -- have demanded to be paid in cah or checks made out to "cash" because they don't want to pay FICA or low rates. In our family we pay all that is due, even the taxes we don't like. The widespread compliance makes me feel like a sucker.

Posted by: Mary | Nov 22, 2012 10:50:13 AM

Sorry. I meant widespread NONcompliance makes me feel like a sucker.

Posted by: Mary | Nov 22, 2012 10:52:04 AM

Blert: "High income earners don't work 40-hour weeks, far from it."

Blert, have you ever owned or run a business? An owner is *never* away from work. Besides being on the job at least 60-70 hours a week, an owner takes the work home with him and while on the road, where it consumes his mind. Owners worry about meeting payroll, collecting receivables, planning expansions, adjusting to markets, dealing with expanding government regulations, etc., etc. Why do they do this? For the payoff. It's so wrong to think that people who are rich haven't worked and taken risks for it. So, before dumping on "the rich," give them some credit for their sacrifices...and for the money they pay to the government to support those who really sit on their rear ends rather than work.

Posted by: Woody | Nov 22, 2012 11:44:24 AM

Greg

Get a grip whether you are making 250000 or 400000 you are working 60-80 hours and that's true of those making a lot less ...such as 120000. you can't choose to just work fewer hours and say I will take less and work 40 hours...most people can't make that choice...I would choose the higher amount even if the last 150,000 is taxed at 45%....maybe you wouldn't...but until they take 50% of my pay I would go for the bucks...too much worry about tax rates to bother me....get serious its the money ... and if you don't look at the effective rate I believe you are missing something.... I would argue that unless the additional amount of my income is taxed over 50% I would go for the dough.....You are going to work 60 - 80 no matter if you make 50,000 or 400000 so why not go for the bucks if you going to have work those hours...and the hell with the tax rate until it gets over 50%.....

Posted by: Sid | Nov 23, 2012 1:40:43 AM

Woody, you got the math upside down.

To earn a high income REQUIRES MORE than a 40-hour work week.

Even film stars pull astonishing hours -- on the set.

Posted by: blert | Nov 23, 2012 5:10:47 AM

It's amazing how HuffPo, Slate, etc. all picked up on the same talking point. There's nothing here that suggests that the chiropractor doesn't understand marginal rates. The authors all seem to assume that the marginal income comes at no marginal cost with regard to time. It's not the chiropractors that seem economically illiterate.

Posted by: No_Rush | Nov 23, 2012 1:08:43 PM

As Barack Obama put it, at a certain point you've made enough money.

Posted by: William H. Stoddard | Nov 23, 2012 1:12:45 PM

Putting aside, AMT, deduction caps, and other ugliness, there are many elements that ultimately make up the Laffer Curve effect ... the notion that raising marginal tax rates does not bring in more revenue.

-- first is the annoyance of having incremental revenue/effort taxed at a higher rate. Not only is the marginal dollar taxed at a higher rate, but you are often earning it based on extra effort ... 10 hours at the beginning of a 50 hour week is much different than 10 hours at the end of a 60 hour week. The joint impact of the longer hours + the higher tax rate takes a toll on willingness to work extra/fork over more.

-- second, for people in lumpy businesses, the impact can be brutal. Contractors, real estate agents, lawyers, professional athletes, performers, etc. may have "a few good years". The whole idea of "a few more points" for someone on a steady income is much different than someone making $60K one year and $300K the next. Many studies have shown that the one thing about "millionaires" in one year is that they are often not millionaires the following year.

-- finally, any dynamic scoring model would realize that those marginal dollars taxed away are often the dollars most likely to be INVESTED in new enterprises, growth and savings. In other words to take $50K away from a guy making $500K/year may not sound devastating to that person, but if the money is going to transfer payments instead of invested in say a new business, growth is lowered.

Again, consistent with the half-educated Puffington Host approach, they point out something very obvious, assume everyone else is an idiot, and miss the entire point in their effort to play spin doctor for the Democratic party.


Posted by: Kurtis Fechtmeyer | Nov 23, 2012 2:02:26 PM

The thing to remember regarding marxists and taxes; it is not about collecting revenue, or even the political benefits of being in control of the redistribution, but it IS about exercising control over the normal people and screwing 'em good and hard just for the fun of it, because mentally ill marxists hate normal people so much.

Posted by: James Solbakken | Nov 23, 2012 2:24:44 PM

People understand this intuitively in their own lives. When they don't understand it with respect to "the rich", it's because they will themselves not to understand.

Your local movie house probably charges something like $3.00 for a 16 oz. soda, $3.50 for 32 oz., and $3.75 for a 55-gallon drum. The marginal price of the "excess" soda (the amount above what you really wanted) is tiny, because they'd really rather have your extra $0.50-0.75 than the few extra cents in syrup that the larger size costs them. The benefit to you is that you don't have to think anymore about how much soda you really want -- your demand will run out before the essentially unlimited supply.

Now imagine that the drinks are sold on a scale of increasing marginal price: $2.00 for 16 oz., $3.50 for 24 oz., $6.00 for 32 oz., and so on. (To keep the analogy working, imagine that the price applies to the aggregate total, so that you can't economize by buying multiples of the smaller sizes.) This pricing structure inherently reduces consumption. Since our hypothetical involves sodas, Mayor Bloomberg probably would like that outcome; consumers, not so much.

Now if you apply the same reasoning to the taxation of labor, it is obvious that the government "should" want to incentivize actions that increase its tax revenues. By offering decreasing marginal tax rates on earned income, it could persuade you to work more than you otherwise would. At some point, your demand for income will run out (because you have a limited supply of time with which to purchase income), but tax rates can and do shift that demand curve.

Posted by: craig | Nov 23, 2012 3:10:29 PM

Sid: This makes no sense: "You are going to work 60 - 80 no matter if you make 50,000 or 400000 so why not go for the bucks if you going to have work those hours". How many people really get to choose to make $50K or $400K for the same number of hours?

The decision is more like I make $250K, my spouse makes $150K, and we have to decide whether it is worth it for both of us to work long hours and put our kids in daycare, or if my spouse should stop working to take care of the kids while they are young. Or do I keep my job that pays $250K with constant travel away from home rather than a different job that pays $150K and I am home every night? Or I do contract work and have some flexibility about how many hours I work per year and decide that Nov/Dec is taxed too high so wait until Jan/Feb for the next contract.

You claim that once the government takes 50%, you would stop, yet your example has a marginal rate above 46%. Why is unreasonable for others to choose to stop at 45% instead of 50%?

Posted by: Greg | Nov 23, 2012 3:47:30 PM