Bob Cropf

Posts Tagged ‘Marginal Rates’

How does the graduate income tax work again?

In 1 on March 4, 2009 at 8:59 AM

ABC news <a href=”http://abcnews.go.com/print?id=6975547 it about people with incomes over $250,000 looking to reduce their income so as to not face increased tax rate.

63-year-old attorney based in Lafayette, La., who asked not to be named, told ABCNews.com that she plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law.

“We are going to try to figure out how to make our income $249,999.00,” she said.

“We have to find a way out where we can make just what we need to just under the line so we can benefit from Obama’s tax plan,” she added. “Why kill yourself working if you’re going to give it all away to people who aren’t working as hard?”

And

“I’ve put thought into how to get under $250,000,” said Poczatek. “It would mean working fewer days which means having fewer employees, seeing fewer patients and taking time off.”

“Generally it means being less productive,” she said.

Poczatek argued that by reducing her income from her current $320,000 to under $250,000 by having her dental hygienist work fewer days and by treating fewer patients, she would avoid paying higher taxes on the $70,000 that would be subject to increased taxation if Obama’s proposal is signed into law.

Additionally, any interest from a checking or savings account or capital gains from stocks, would also count as taxable income.

“The motivation for a lot of people like me — dentists, entrepreneurs, lawyers — is that the more you work the more money you make,” said Poczatek. “But if I’m going to be working just to give it back to the government — it’s de-motivating and demoralizing.”

I couldn’t find the original article, but my understanding from Krugman’s comments is that they added significant discussion about how our marginal income tax works… you only pay the higher rate on the money falling above the $250K mark, not all of the income.

I am trying to imagine what the impact of the system that these people apparently think is in place… and what a rude awakening it might be to “work” to get your $300K+ income under $250K only to realize that you really haven’t reduced your tax burden relative to your income that much but you have reduced your income substantially. Such a system could do a lot toward restructuring our over-worked society.

However, the issue of taxing savings account interest and capital gains in another question altogether. I agree with the taxing of capital gains, it is not “work” and it is not going to taxed as such a rate to discourage people from investing anyway. The savings account interest in another issue. Right now, the increase from negative savings rate to ~5% savings is not helping the situation (prior to 1980s it was ~12%, oh those were the days…), but in the long run, doesn’t it make sense to incentivize plain ol’ regular savings to help us avoid messes like this? Maybe a cap of sorts, saving up to a certain amount are tax exempt…

Also interesting to note that the two people quoted in the interview were women. That strikes me as unusual.

-kc

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