Does Anybody Here Understand What A Tax Bracket Is?

by | March 3, 2009

My post about ignorant rich people who think they can have a higher after-tax income by holding their earnings under $250,000 a year brought on a follow-up from National Review's Stephen Spruiell:

But these taxpayers have other reasons to be worried. Obama has proposed increasing the tax rate on capital gains and dividends from 15 to 20 percent for those taxpayers earning over $250,000 (married) and $200,000 (single). If that's implemented without any kind of phase-in, then going from $249,999 to $250,000 incurs a pretty big tax penalty, right?

Maybe I'm wrong about this (if I am, I'm sure Chait will let me know).

Jesus Christ, yes, you're wrong. Taxes on capital gains income and dividends work the same as taxes on ordinary income. When you move int a higher bracket, only the income above that level is taxes at the higher rate. So, the lowest ordinary income tax rate is 10%. Everybody, including Bill Gates, pays some of their income tax at the 10% rate. Nobody pays their highest tax rate on all their income.

Could Obama design a tax hike such that people would have to pay thousands more in taxes because they went from $249,999 a year to $250,000? Of course he could. He could do the same with the reduced tax deductions for high-income earners. But he won't. Nobody has ever designed a tax system like that.

Commenter "ratnerstar" has the right idea here: It's time to stop educating these ignorant rich people and start taking advantage of them. We have some number of high-income people out there who earnestly think they can increase their take-home pay by decreasing their salaries.This is one of the great scamming opportunities of all time, with the side bonus that the targets richly deserve their fate.

So I'm through correcting these people. My new line is: Yes, you're right. That socialist Obama is creating an insane tax code that gives people a massive incentive to stay under $250,000 a year. If you find yourself over before the next tax year, just write a check to me for the balance. Call it income tax consulting. (I should explain, given the level of awareness we're dealing with here, that business expenses can be deducted from taxable income.) In return for this, we can split your tax savings 50-50. What a deal!

--Jonathan Chait

Source URL: http://www.newrepublic.com//blog/the-plank/does-anybody-here-understand-what-tax-bracket