The arithmetic of taxing the “rich”

Its a classic example of effectively controlling a message. The proponents of extending the Bush tax cuts appear to have won the battle for defining the message that resonates with a large segment of the voters, “You don’t need a tax increase”.  The fact that the sound bite message is based on a false premise is of little relevance to the purveyors of that message.

The consistent message has been that letting tax cuts expire  for those making above $250,000 would be a  “Tax Increase”.  True enough, but the message is artfully crafted to minimize the part about the over $250,000.

The success of the message depends to a degree on ignorance of how our tax system really works.  The key point of the message is that the tax rate for  those earning over $250,000 would increase from 36% to 39%.  The desired inference is that the tax burden for a family making $250000 would increase to $250,000 x 39% or $97,500.  Sounds like a lot, and it is… if it were true.

The reality is that the 3% tax increase would apply to only the amount over $250,000.  For example, a family with an income of $300,000 would pay an extra 3% on the amount above $250,000 ($50,000) or $1500.

Another reality that is not mentioned by the proponents of extending the tax cuts to the top bracket is that at least some of the tax cut extensions would extend to everyone,  even those making over $250,000.  Since our tax system is progressive, income is taxed by brackets so that it doesn’t matter what your total income is, everyone is taxed at the same rate for a given bracket.  If the lowest tax bracket is 10% on $0 to $ 16,750 then, someone making $30,000 per year would pay 10% on the first $16,750 or $802.50.  Someone making $250,000 would also pay 10% on the first $16,750 or the same $802.50 and so on up through the tax brackets.

I suppose kudos should go to John Boehner and his colleagues for masterfully leveraging the electorate’s lack of critical thinking to promulgate the notion that there are tax increases looming for everyone. It’s unfortunate to think that there will be a segment of the population that will be pulling the lever in November based on a false understanding of the competing tax proposals.


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