Marginal Tax Rates

When there is talk about tax rates on the very rich, it is about marginal tax rates. The tax rates apply only on income above a certain amount. So for the first part of their income, their taxes remain the same. I recently posted about how it works. I'll republish it so people can refer to it easily if they want.

http://www.washingtonmonthly.com/political-animal-a/2012_11/guess_who_else_doesnt_understa041510.php

November 30, 2012

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But there’s one piece of classic Noonanalia that merits special attention. After a couple of graphs suggesting that Republicans need to realize their aversion to higher taxes on the wealthy has been repudiated by voters (a rare moment of clarity!), she turns and argues against Obama’s proposal for higher taxes on the wealthy by illustrating she is among the remarkably large number of pundits who do not understand marginal tax rates:

Mr. Obama wants to raise tax rates on those earning $250,000 or more, as we know, on the assumption that they are “the rich.” But if you are a man with a wife and two kids making that salary and living in Westfield, N.J., in no way do you experience yourself to be rich, because you’re not. You pay federal payroll and income taxes, state income and sales taxes and local property taxes, and after the mortgage, food and commuting costs you don’t have much to spare.

Tighten the squeeze on that couple, and they’ll change how they live. They’ll stop sending the struggling son to a neighborhood tutor, they’ll stop going out to dinner once a week, they’ll cut off the baby sitter, fire the guy who once a month does yard work, and hold back on new clothes. Also the guy will peruse employment ads in Florida and Texas, potentially removing from blue-state New Jersey his heartening, taxpaying presence.

The fictional burgher living the virtuous life in New Jersey on a quarter-mil of taxable income would not, of course, pay a dime in higher taxes under Obama’s proposal. He would, in fact, get a major tax break compared to what he would face under current law, like everyone else, on the first quarter-mil he earned. But even if reject that construct and with it the idea that the Bush tax cuts were never designed to be permanent, Mr. Jersey would still be held harmless. Those higher rates that supposedly threaten the “struggling son,” the local restaurant, the babysitter, the yard man, the clothing retailer, and the State of New Jersey would only affect the money he earned after $250,000.

You’d think someone with a column in the Wall Street Journal, of all places, could grasp how this works. But I suppose everything Peggy Noonan needs to know she learned in that Golden Era that ended in 1989.