Tuesday, September 6, 2011

Catch of the Day

Dean Baker, over at the Center for Economic and Policy Research, catches USA Today Weekend [see Update below] claiming that one can reduce one's income by getting a raise and moving into a higher tax bracket. Of course this gets it all wrong:
No, no and 286,000 times no! The tax system brackets give marginal rates. This means that if the raise bumps you into a higher bracket then you pay more taxes only on the income in the higher bracket. Suppose that the tax bracket for income under $200k is 25 percent, and for income over $200k is 33 percent. If you get a raise that pushes your income from $195,000 to $205,000 then you only pay the higher 33 percent tax rate on the $5,000 that is above the $200k threshold not your whole income. Therefore, there is no (as in none, nada, not any) way that getting more money, and being pushed into a higher tax bracket will leave you with less money after taxes.
Great catch! (Via Nyhan).

The really depressing thing about this isn't just that they're peddling misinformation. It's reporters and editors who don't know basic stuff about how, say, US income taxes work could  not possibly be in a position to evaluate policy proposals from politicians. Or just campaign rhetoric, for that matter. I've talked about some instances where I believe most Americans have no idea what they're talking about -- what a federal budget deficit is, or whether or not they actually pay income taxes. But this is a good reminder that many of the reporters and editors (and TV producers) who cover this stuff may also have no idea what they're talking about.

Yes, there are quite a few excellent, well-informed reporters out there. But this kind of stuff is all-too-common, and, yeah, extremely depressing.


UPDATE (and correction): Greg Marx has plenty more, including a guest role for one of the commenters below. He also points out that it was USA Weekend, not USA Today, as I first had it. Corrected above.

7 comments:

  1. USA Today gets it wrong but it seems like they are citing a book by math educator Laura Laing. It isn't surprising to see this myth repeated because conservative pundits have trumpeted it for decades. Apparently it has now become the conventional wisdom.

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  2. I generally agree with the thrust of this post, but... I haven't done the math, but isn't it at least possible that the loss of certain deductions as AGI rises, or the advent of ATM, could create a situation where rising gross income could result in a lower after tax income? Say you blip over the max AGI for taking a certain deduction or credit (say a $1000 credit of some kind), but only barely (say by $500), such that you would be better off staying below the threshold and getting the credit/deduction. Admittedly, (1) it would only happen at relatively higher incomes, (2) it would probably be a very narrow window and (3) the complexity of the calculation and narrowness of the window would probably prevent the phenomena from being a real disincentive to trying increase earnings. But all that said, it does not seem facially impossible that such a thing could happen in our tax system. Again, I agree with the thrust of your post - this is not a systemic problem in our tax system, and I can't point to a specific example of it ever happening, but it doesn't strike me as completely impossible if you take means-tested credits and deductions into account.

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  3. But all that said, it does not seem facially impossible that such a thing could happen in our tax system.

    'Not-facially-impossible' is a pretty low bar. It's not facially impossible for the Pirates to go all the way -- yet.

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  4. @Anon, yes probably, but those scenarios are not what USAT is talking about. They are doing the arithmetic of going from one bracket to another, and they say that going up in brackets reduces your income. That's not correct.

    If there's some odd quirk with deductions, or if you get shoved into an entirely different tax structure (which is what the AMT is), that's totally different.

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  5. If we treat deductions as what they are--tax spending programs--then it's impossible.

    Of course, nobody thinks of them as tax spending outside of us geeks. (and usually only us liberal geeks)

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  6. I agree with you. One of the reasons why the Left is falling out of favor these days is the sham of calling taxes "spending".

    Everybody else gets that taking somebody's property isn't "spending", and this form of rhetorical trickery is just an own goal for the Left.

    Now, arguing how we tax is important, but best to start at a coherent beginning. Veer off from that immediately, and people might just start ignoring your whole argument. Full throated populism and "fairness" arguments can gain traction, but can be polluted by trickery.

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  7. I think people get converted to this view when they get bonuses and the government hikes up their withholding as if they earned that much all year, leading to a smaller paycheck overall. Then it's like "who are you going to believe, math or my lying eyes?" Not that I've ever seen one of these smaller paychecks, but lots of people claim to have gotten them.

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