When President Obama says he's going to raise the top marginal tax rate, the key words there are "top" and "marginal." According to the president's plan, every dollar under $250,000 of earned income will enjoy the same tax cut it has today. He's only pledged to raise taxes on income above that level by about 5%. So, if you make $251,000 next year, your tax bill wouldn't go up by $12,000. It would go up by $50. A steak dinner, not a small car.I am amazed by the number of people who think that a 50% marginal rate on incomes over $1,000,000 means that a person making a million a year would pay $500,000 in taxes, not understanding that all the income below that amount taxed at lower rates, when only the money above a million would be taxed at that rate. People just don't get math. A lot of these people may make way more money than me, but I've got them beat in the math department. I'll keep that in mind as they pass the Focus in their fancy cars. I've got to comfort myself somehow.
Basically, Kristina Collins is making a miscalculation that's probably worth tens of thousands of dollars. No wonder she doesn't want to expand her company.
An economic journalist needn't play financial adviser for his sources. But the distinction between marginal and total rates is confusing and ought to be made clear to readers. If thousands of small business owners like Mrs. Collins are operating under the presumption that Obama wants to raise taxes on every dollar of income for rich households, some might choose to keep from expanding their businesses. That's not just bad for their hypothetical new employees. It's bad for them! If not understanding the tax code is preventing you from working, that right there is ignorance making you poor.
Tuesday, November 20, 2012
Explaining Marginal Rates
Derek Thompson tries to explain how marginal tax rates work for the successful, but not mathematically gifted businesspeople out there (his example being a chiropractor who plans to shut down the business and take a vacation if she and her husband get too close to making $250,000 a year):