Tax rate illiteracy

Jon Chait points out this recent NYT article that just doesn’t seem to get the concept of marginal tax rates.  Lots of people don’t actually get this– but people writing about financial issues for the NYT most definitely should.  Especially, because I suspect that a fair amount of opposition to tax increases comes from misunderstandings of how marginal rates work.  Chait:

The article delves into the question of just who counts as rich. I think it’s a silly question. Rich is a relative question. It doesn’t mean you can buy everything you want. If you’re in the top 2% of the income distribution, then you are, relative to 98% of the population, rich. You are more able to bear the cost of higher taxes.

But put that aside. 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 taxes at the top rate.

It seems like the wntire tax debate has been conducted under a could of basic ignorance about how tax rates work.

Hmmm.  I think a lot of debates in this country are sadly conducted in “basic ignorance.”   Take for example, this Op-Ed in our NCSU campus newspaper which is stunningly ignorant and shamefully poorly written (and yes, by the same person writing a whole column on me, the liberal indoctrinator).  Literally nobody is suggesting that the government tell churches who they can and cannot marry, but that is the basic premise of this column on gay marriage.   And, I’m sure I spent at least several minutes covering these basic facts in the American Government class the writer took.  Ignorance—arghhhh!

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About Steve Greene
Professor of Political Science at NC State http://faculty.chass.ncsu.edu/shgreene

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