Watching news reports about President Obama’s proposed tax changes,
\nI’ve seen a number of variations on a very annoying theme, which involves
\na very stupid math error.<\/p>\n
A typical example is this story on ABC news, which contains a non-correction
\ncorrection:<\/p>\n
\nPresident Barack Obama’s tax proposal — which promises to increase taxes for those families with incomes of $250,000 or more — has some Americans brainstorming ways to decrease their pay in an attempt to avoid paying higher taxes on every dollar they earn over the quarter million dollar mark.<\/p>\n
A 63-year-old attorney based in Lafayette, La., who asked not to be named, told ABCNews.com that she plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law.<\/p>\n
“We are going to try to figure out how to make our income $249,999.00,”
\nshe said.<\/p>\n“We have to find a way out where we can make just what we need to just under the line so we can benefit from Obama’s tax plan,” she added. “Why kill yourself working if you’re going to give it all away to people who aren’t working as hard?” <\/p>\n<\/blockquote>\n
The original version of this article continued to follow this basic theme. The
\nupdated article pretends to correct it, while still basically mantaining the
\nsame focus.<\/p>\nThe idea behind this, and similar stories, is that raising the income tax
\nrate on people earning over $250,000 per year creates a threshold, where earning
\nmore<\/em> than that threshold will result in your taking home less<\/em>
\nafter-taxes pay than if you earned less.<\/p>\n<\/p>\n
How could that happen? (I’m making up nice round numbers here to illustrate;
\nthese have no relation to real tax rates.) Suppose that the tax code was set up
\nso that if you earned less than $250,000, you paid 20%; and if you earned more<\/em> than $250,000 per year, you paid 30%. Under that system, if you earned $249,000 per year,
\nyou’d pay $49,800 in taxes, for an after-taxes take-home of $199,200. If you earned
\n$251,000, then you’d pay $75,300 in takes, for an after-taxes take-home of
\n$175,700.<\/p>\nSo if<\/em> taxes actually worked this way, then there would be a range
\nof incomes where there would be a strong motivation to keep your income
\nsmaller<\/em>, in order to avoid crossing the threshold – because earning more
\nwould translate to earning less after taxes.<\/p>\nThe ABC story, and all of the others I’ve been seeing\/hearing have either
\nimplied or directly stated that that’s how our tax system works – and that therefore
\npeople earning close to $250,000 are frantically searching for ways to keep their income
\nbelow the horrible $250,000 threshold.<\/p>\nThe problem is, that’s not how our tax system in the US works. Anyone who
\npushes this story is either too dumb\/uninformed about how US income taxes work
\nto be commenting on it, or they’re liars.<\/p>\nThe way that the US system works is that there’s a base rate of taxes. You pay
\nthe base rate on all of your income up to a threshold. When you cross that threshold,
\nthe tax rate on the part of your income above that threshold<\/em> is
\nincreased. The Obama proposal is to add a new threshold: the tax rate on the
\npart of your income above $250,000 would be increased – not<\/em> the
\ntax rate on the entire thing.<\/p>\nTo go back to our example, imagine that $250,000 was the only threshold,
\nand that the base tax rate was 20%, but that the rate on income above $250,000
\nwas 30%.<\/p>\nIf your income was $249,000, then your tax bill would be the same – $49,800,
\nfor a take-home of $199,200. If your income was $251,000, then you’d
\npay 20% on the first $250,000, and 30% on the $1,000 above $250,000. So
\nyour tax bill would be $50,000 + $300 = $50,300 – for a take-home
\nof $200,700. Of your extra $2,000 in income, you’d take home $1,500 – or 75%.<\/p>\nThis story is a lie, plain and simple.<\/p>\n
As usual, I’m trying to avoid the politics of this as much as possible. It’s
\npossible in good faith to think and argue that people earning more than $250,000 per year
\nare taxed too much; it’s also possible in good faith to think and argue that
\npeople who earn more than $250,000 aren’t taxed enough. You can make a reasonable
\nargument that raising taxes on those people will hurt the economy; you can make
\na reasonable argument that raising taxes on those people will help the economy.
\nFor the purposes of this post, I’m not taking either side on whether the proposed
\nhigh-income tax-hike is a good idea or a bad idea. But this threshold argument
\nabout how people need to keep their income down in order to avoid getting screwed
\nby the hike isn’t a reasonable, good-faith argument. It’s a lie, and even the
\nmost rudimentary attempt to check if it makes sense would show that it’s transparently false.<\/p>\n","protected":false},"excerpt":{"rendered":"Watching news reports about President Obama’s proposed tax changes, I’ve seen a number of variations on a very annoying theme, which involves a very stupid math error. A typical example is this story on ABC news, which contains a non-correction correction: President Barack Obama’s tax proposal — which promises to increase taxes for those families […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":false,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2}},"categories":[71],"tags":[],"class_list":["post-749","post","type-post","status-publish","format-standard","hentry","category-bad-economics"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p4lzZS-c5","jetpack_sharing_enabled":true,"jetpack_likes_enabled":true,"_links":{"self":[{"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/posts\/749","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/comments?post=749"}],"version-history":[{"count":0,"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/posts\/749\/revisions"}],"wp:attachment":[{"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/media?parent=749"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/categories?post=749"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.goodmath.org\/blog\/wp-json\/wp\/v2\/tags?post=749"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}