The New Republic

"(These stories, which have appeared constantly in the media, all seem premised on a failure to understand that the structure of tax brackets mean that only the portion of one's income over $250,000, rather than the whole thing, will be taxed at a higher rate.)" Decades ago, I had to work on implementation of a payroll system, in which we transitioned hourly employees from being paid twice each month to their being paid every two weeks. Obviously the latter introduces two additional paychecks per year, resulting in two calendar months each year during which the hourly employees got three paychecks. To my astonishment, I had an endless stream of these people coming to complain that in those two months they would be bumped into a higher tax bracket, resulting in their paying a higher net tax for the year than before. I couldn't convince 2 out of 3 of them otherwise. My point: people don't understand their paychecks and they don't understand taxes. This is what enables the Republicans to scream "tax increase" and convince workers they are going to get creamed by massively higher taxes. Democracy is a terrible form of government, except by comparison to the alternatives.

- IowaBeauty

May 12, 2011 at 12:08pm

This chart is a textbook example of how to lie with graphs. Since the bar heights represent aggregate amounts within an income range, changing the bin size changes the height of the bars in each bin. The sharp rise at 100 K is an artifact of quadrupling the bin size from 25K in the 75-500K range to 100K in the 100-200K range. A more meaningful chart would bin by percentiles. Were you to do so, you would see that all the income to the right of the peak goes to 3% of the population, while all the income to the left of the peak is distributed among 80% of the population. For what it's worth, as someone whose household income is in that upper-middle range I'll go on record as saying I'd welcome higher marginal rates on the amount we make over $100K. Paying few more percent in taxes is a bargain in exchange for a stable economy, health care for those less fortunate than I, educational opportunity for every child regardless of parental income, a clean environment, and a strong national defense. It would be nice if that small percentage of folks with incomes higher than mine would be willing to contribute even more. I can afford to pay more in taxes, and someone making twice my income can afford to pay at an even higher marginal rate. Anticipating Mr. Rat's complaint that the wannabe-Galts in the top 3% create jobs while the rest of us are mere parasites, I will add that quite a few jobs are created by people throughout the income spectrum. Plumbers, nannies, gardeners, teachers, builders, surgeons, and more are all employed directly as a result of the demand for their services created by a strong middle class.

- krlong014

May 12, 2011 at 12:12pm

$250,000 annual income is not middle class. $100,000 annual income for an individual is not middle class. I would be ecstatic to be making $90,000 annually, and I'd consider myself rich for doing it. What an insulting chart that is.

- Konstantin

May 12, 2011 at 12:16pm

What the WSJ and others on the right mean is that there are more people on and to the left of that highest bar; indeed, those to the right who, as Chait points out, earn $2 trillion, comprise less than 3% of the total population. Spread the burden more broadly is their goal, as opposed to spread the wealth; concentrating income among the very few is just fine with them, thank you. And I don't wish to be a party pooper, but those who earn between $100,000 and $200,000 per year, the folks that the WSJ believes are undertaxed, pay roughly the same effective tax rate as the folks in the bar on the far right (taking into account all federal, state, and local taxes). Why so much love from the WSJ for those in the bar on the far right but no love at all for those in the highest bar when they are paying roughly the same effective tax rate?

- rayward

May 12, 2011 at 12:21pm

Again you have trouble with "affect" vs. "effect," Jonathan. Well, once more, this chart proves the the adage about "lies, damned lies, and statistics." Statistics are great, they are extremely useful, it is just that people with agendas rip them out of context or misuse them by some other sleight of hand, like in the chart above. I read a great book last month that I recommend: Proofiness: The Dark Arts of Mathematical Deception by Charles Seife. He rips into Al Gore for exaggerating certain effects (nota bene, JC) of global warming and he has a delicious section where he shreds Antonin Scalia and Clarence Thomas concerning Census sampling. You retail an amazing anecdote, Iowa.

- liberalref

May 12, 2011 at 12:23pm

I read something quite funny a little while ago in my email inbox. It was in the email from Time.com which I receive every morning. There was a headline that read "Obama's Not A Lock," and the teaser read "He's vulnerable when Republicans stop talking nonsense and turn to the economy." I thought to myself, what fool wrote that? It transpires that it was Joe Klein. I was thinking, but Joe, the Republicans talk nonsense about the economy, too.

- liberalref

May 12, 2011 at 12:31pm

Jonathan, this post would have been more devastating if you'd actually had one of your interns create the proper chart (with the same data).

- NR409654

May 12, 2011 at 12:42pm

Excellent idea, NR. Can you order this up, JC, and repost this thread?

- liberalref

May 12, 2011 at 12:48pm

krl, that last is a good point. In fact, it's worth pointing out that those putative job creators would have no business if it weren't for a strong middle class. That's one reason the economy is merely sputtering along. libref, Jon's affect/effect confusion is one of my pet peeves. (He did it yesterday too, in a particularly ironic turn, in the oil tax note, where politicians are able to "marginally effect" gas price increases.) I've commented in private, but to no avail. Will public shaming have any effect?

- ramcat

May 12, 2011 at 12:54pm

Here.. I fixed it. It's not exact, but I'd be willing to bet it's error rate is around 5% (low enough). http://imageshack.us/photo/my-images/16/agiw.jpg/

- ChrisEB

May 12, 2011 at 1:01pm

Iowa - I'm very glad I didn't live your story; just imagining that frustration makes me grit my teeth. It isn't just about taxes and paychecks, though. I spent most of last weekend in a cave. Yesterday, a coworker said he never goes in caves, figuring he'll be in one during an earthquake, the place will collapse, and he'll die horribly. I recounted that our guide addressed that, noting that the cave is eons old in a region that gets hit by massive quakes every 200 years, and yet remains uncollapsed. My coworker's response? "They just say that to keep people coming back." People believe what they want to believe, a reality that depresses me whenever I think of the need for educated voters.

- janus

May 12, 2011 at 1:08pm

Konstantin, Middle is a big place. Some things to think about: 1. Middle class is a broad category, when measured in annual $, as befits the concept of middle. I wouldn't dismiss a family earning $250K as out of the middle class, if in fact they have small enough assets that they cannot stop working and continue to live very comfortably on investments. 2. A lot depends on how long you earn that $250K. I've had years that good, but I've had plenty of years when my earnings were 15% of that too. If you peak at $100K as an individual in middle age, with a slow ramp up, and a lot of job risk post age 45 because of your profession and age and the state of the economy, you could earn 100K for multiple years, but never really get beyond basic middle class security. 3. Mostly, middle class is state of mind. I considered myself middle class, albeit on the lower end, when my family of four lived on the equivalent of $35K in today's dollars, and I didn't change my fundamental approach to life or wealth in the years when I've drawn 10X that. I may be lucky and upper middle class now, but I am by no measure that make sense a member of the investor or capitalist class. That said, I have no objection to paying the Clinton-era rates on my 6 figure income, or even a bit more, if it gives us a stable economy, allows us to invest in my children's and grandchildren's generation's education, in environmental stability, and in R & D for the future. What the hell kind of country is it that won't tax the demonstrably well off of this generation for the benefit of the future? One that does not deserve survive, to my mind.

- IowaBeauty

May 12, 2011 at 1:13pm

Nice job, chris. Thanks. Leaving aside the graphics, all you really need to know is that the top 10% of earners in America now have something very close to 50% of our total income. Our Net Domestic Product (Gross Product less capital depreciation), less the portion that is income of charities, is just shy of $13 trillion. That means that the top 10% have upwards of $6 trillion of economic income. A 40% effective tax rate on the economic income of the top 10% would cover the entire Federal operating budget. I believe that the cut-off today for the top 10% is $120,000, although this is a bit misleading because it is, I believe, a figure for adjusted gross income, not economic income. The average economic income for the top 10% (13 million households) clocks in at about $475,000. To yield 40% as an effective rate, you would exempt the first $120,000 and tax the balance at 54%. That is a system with two marginal rates, zero and 54% for household income above $120,000. Of course, this depends on including ALL economic income in the base. We should put an end to two-tier corporate taxation and pass all income directly through to owners/shareholders. This would have been impractical a short time ago, but with computers it is easy. You withhold at the corporate level at 54% and then let those whose income is too low for this marginal rate get a refund. Current calculations of taxable income are mindbogglingly convoluted. This is completely unnecessary.

- roidubouloi

May 12, 2011 at 1:39pm

Iowa, we might not survive, it all depends on how long we who care enough to plan for the future can hold out against those who are too myopic to see past their next paycheck.

- GSpinks

May 12, 2011 at 1:45pm

I'm with Konstantin. Since when is $100K "middle class," if one assumes that means "middle income," or median income. It isn't. Not even close. Most Americans - American households even - earn far less. I believe 75% of us - households - earn well under $50K? in that range. This is not to say that people earning $100K or even more, up to $250K, for example, are secure and independently wealthy. Obviously, people earning this kind of money have a good chance, if they are careful and lucky, at becoming secure and independent whereas people earning small annual salaries, however frugal, simply are not - there are just too many obstacles - expenses are too high and there are too many setbacks - job loss even career loss has been a staple for many of us the past few decades and on top of, rising costs including the huge whammy - health care. Nevertheless many people earning large salaries are not safe and secure, as many are finding out; if they depend upon wages to survive, and lose their jobs, everything is likely to be forfeit within a relatively short time. That's why the loss of home value is so catastrophic - all too many Americans have their eggs in one basket - the house - and how many of those - expensive or otherwise - are now underwater? Add that to falling portfolio values - pretty soon your security is merely an illusion and you could be holding the bag on a short-sale - less one house, six figures in debt. People are greatly underestimating, I think, how bad this recession really is. I think it's closer to a Depression. I personally know several people who have lost their homes because they can't sell them for anywhere near the mortgage value nor can they charge sufficient rents to cover the monthly nut - people are thisclose to the street. Obviously those with less to begin with - ie who've consistently earned small incomes - are more likely to be hurt like this but not necessarily. Former masters of the universe could well wind up in big trouble - just watch (ok don't barf) the "Real Housewives" - here are people, spoiled people, including some who are very hard-working - still - people who think nothing of spending thousands in an afternoon - on a dress, a Botox procedure, jewelry - losing their homes. The jobs, the elasticity in the economy just isn't there and underlying inflation is rampant despite what the cost of living index claims - conveniently it doesn't include the prices of gas, energy and food in the equation - hence the whole equation is ridiculously innaccurate. What this says to me, aside from the obvious disparity in income and wealth, is that the need for sharing resources has never been greater. None of us is immune from catastrophe; therefore, strengthening social networks including basic income and benefits levels is absolutely vital, otherwise we're all vulnerable. Even the well-to-do can fall through the cracks in this system. Imagine what it is like on the bottom.

- Sophia

May 12, 2011 at 2:26pm

Sophia, Historically, Middle Class has never meant "median income." It has more often referred to people who are in the managerial or professional, as compared to the working or capital-controlling class, or to those with sufficient financial stability and security to own their own homes or small businesses. That covers a lot of territory.

- IowaBeauty

May 12, 2011 at 3:01pm

This post links to a Catherine Rampall post on an ABC News piece promoting the marginal fallacy. Linked to the Rampall piece was a Jonathan Chait post on the same subject. Unfortunately, that link is broken. Which is a damned shame because, if I recall corrrectly, Chait had embedded this graphic. I remember thinking at the time that is was just about as perfect an image as could be imagined to illustrate the topic.

- kpidcoc

May 12, 2011 at 3:29pm

Sophia: "Most Americans - American households even - earn far less. I believe 75% of us - households - earn well under $50K? in that range." US median household income is about $50k, so about half make under that amount. http://www.census.gov/prod/2010pubs/acsbr09-2.pdf

- dsimon

May 12, 2011 at 11:54pm