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.
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
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.
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.
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.