The way politicians and media frame the issue of the Bush tax rates is at odds with one of the fundamental principles of the income tax system, and it unnecessarily warps public understanding of what’s on the table.
Can we clear something up?
The debate in Washington has been focused for months on income tax rates. But the way politicians and media frame the issue of the Bush tax rates is at odds with one of the fundamental principles of the income tax system, and it unnecessarily warps public understanding of what’s on the table.
Facing record deficits and growing debt, President Barack Obama has proposed letting the Bush tax cuts, enacted as a temporary measure in 2001, expire for income over $250,000, raising that rate from 35 percent to 39.6 percent, though he has indicated flexibility on the rate if new revenue can be found elsewhere.
The problem is in the way this decision is too often formulated. The shorthand used by politicians of both parties as well as in the press, says that “President Obama wants to raise taxes on families earning more than $250,000.”
Put that way, the idea is understandably disturbing to people who earn anywhere near $250,000. It offends their sense of fairness, raising complaints of class warfare. “But we’re not rich,” they say. Why should we pay at a higher rate than other people?” Worse, some threaten to keep their earnings under $250,000, so they won’t be taxed at a higher rate.
But tax rates don’t apply to families. They apply to income.
The system is built on “marginal tax rates.” Under the current schedule, that means everyone pays the same tax rate — 10 percent — on the first $17,400 of income (figures for married couples filing jointly). They pay 15 percent on taxable income between $17,401 and $70,700, and the brackets edge up from there to income over $388,351, which is taxed at 35 percent.
The point too few understand is that, under Obama’s plan, all taxable earnings under $250,000 — remember, that’s earnings after deductions, not gross pay — would still be taxed at the current Bush rates. It’s only the amount over $250,000 that would be taxed at a higher rate.
In other words, if your taxable income is $251,000, don’t worry that you’ll be punished for being rich. You’ll pay the same old tax rate on everything except the final $1,000.
The tax rate for the highest earners has been all over the map in the last half-century. It was 91 percent on income over $400,000 when John F. Kennedy was president, 70 percent on income over $200,000 during Lyndon Johnson’s second term, 50 percent on income over $106,000 when Ronald Reagan was president, and dropped to 28 percent on income over $32,000 under George H.W. Bush.
Under Bill Clinton, the top rate rose to 39.6 percent on income over $250,000, and under George W. Bush, it dropped to 35 percent on income over $379,000, which is about where it stands today.
Yes, it’s difficult to explain to people unfamiliar with marginal tax rates that different dollars of their income are taxed at different rates. Since these calculations are incorporated in the tax tables, it’s not something people really need to know. Filling out tax forms is complicated enough as it is.
But politicians and the press could make things a little less confusing if they would stop talking about raising taxes on households above $250,000 and instead talk about raising rates on income above $250,000.
MetroWest Daily News, Framingham, Mass.