There really are people planning to reduce their income to get below Obama's $250k bracket

http://blogs.tnr.com/tnr/blogs/the_plank/archive/2009/03/03/wealthy-idiots-meet-idiot-reporter.aspx

by tptacek • 17 years ago

56 73 17 years ago

blogs.tnr.com

tptacek7• 17 years ago

I don't have high hopes for this getting upmodded, but it sure is a funny story.

icey• 17 years ago

The past couple of weeks have really been a lesson in FUD. I have politically active family members on both sides of the line, and its amazing to hear how different every policy sounds from each of them.

anamax6• 17 years ago

> The past couple of weeks have really been a lesson in FUD. I have politically active family members on both sides of the line, and its amazing to hear how different every policy sounds from each of them.

The fact that different people see the same thing differently does not imply FUD.

An elephant from its rider's perspective is very different from an elephant as seen by an ant.

earl• 17 years ago

Wow, both a journalist and lawyer were too stupid to figure out how the tax code works? This really isn't rocket science.

Every time journalists and newspapers whine and carry on about going out of business... they need this quoted to them. The problem with taking advice from stupid people is you can't use it -- you have to check everything yourself instead of trusting the information. Which essentially renders any newspaper written by reporters like this utterly useless.

tptacek7• 17 years ago

I like the "new media" angle here --- a professional ABC newsroom ran this batshit crazy story, and the blogomosphere caught and corrected it. Death of the republic predicted, film at 11.

yan• 17 years ago

If I had a nickel every time I had a conversation clearing up the US tax code just a little bit, explaining that each bracket gets taxed individually, I'd be making money in a very weird way.

bprater• 17 years ago

So what is my tax rate if I go from $249,999 to $250,000?

How much money in real dollars do I lose when I earn a buck more to make it to a quarter million?

bkbleikamp• 17 years ago

The $1 gets taxed in the highest tax bracket.

vaksel2• 17 years ago

You'll pay 4 cents more in taxes compared to what you pay now. Although to be fair, you'll probably pay less than you do now, since the lower brackets will get a tax break.

aaronblohowiak3• 17 years ago

Your question implies a lack of understanding of how our tax system works. You have several tax rates, covering different portions of your income.

tempest67• 17 years ago

I see this has been answered several times already, but I'm not sure it has been laid out plain and simple:

The first $250K any American makes gets taxed at exactly the same rate. For everybody. It's the same for any value -- Bill Gates pays exactly the same tax rate on the first $50K he makes in a year as I do. The rates go up for successively higher values -- your first n dollars may not be taxed at all; then your next n dollars is taxed at a low amount, and successively higher. These bottom rates will not change no matter how much your total income is.

When they talk about raising the tax rate for people that make more than a certain value, they are talking only about taxes on the money OVER that value. So only your 250001st dollar gets taxed at the higher rate -- as will every other dollar you make on top of that. The tax rate for the rest of your money will not change at all.

abossy2• 17 years ago

The point is that the work incentives are diminished at your high income. The value you are creating that is being compensated for at ~$250k hits a glass ceiling. You aren't exactly losing money, there's just no point in working more at your highly specialized profession.

The author of the original article doesn't quite understand this point.

A blog post by (right-wing) Harvard professor Greg Mankiw clearly explains this: http://gregmankiw.blogspot.com/2008/10/blog-post.html

patrickg-zill• 17 years ago

If you make more than $250K and donate a lot to charity, you could be hit pretty hard - you can only take a deduction equal to a tax bracket of 28% rather than the higher tax bracket you fall into.

gojomo2• 17 years ago

This behavior is not classically rational, but as experiments like 'The Ultimatum Game' [1] show, people aren't rational in such matters. They will accept less for themselves if they feel they're being treated unfairly.

Some people feel progressive taxation is unfair. Even if you think it's fair, you might have objections to tinkering with the level of progressivity to buy votes, or in times of crisis, or in times when the politically-favored (be they defaulting homeowners, too-big-to-fail banks, or those running agencies and projects fortified by stimulus spending) are drawing extra billions (trillions?) from public funds.

So while these >$250K earners are not being hyperrational after-tax income maximizers -- and hardly anyone is -- they are behaving in a very typical human way.

[1] http://en.wikipedia.org/wiki/Ultimatum_game

tptacek7• 17 years ago

That's plausible and interesting, but it's not what the story says. The story says these people believe that if they gross less than $250k, they will somehow net more money than if they grossed more than $250k.

gojomo2• 17 years ago

I could not find any quotes in the ABC story that unambiguously indicate the taxpayers think they would net more after-tax money with a lower income. The closest is the initial Louisiana attorney, but even there it's clear the main motivation is resentment -- and the "give it all away" comment is hyperbole.

Meanwhile, the tax accountant quoted on page 2 allows that it's possible a discontinuity with regard to deductions could create a situation where you would net more by reducing your income. The tax code is gigantic and buggy; it's not out of the question that a few taxpayers, in certain narrow situations, sometimes face marginal rates over 100%.

In any case, my point is not with an overly-literal interpretation of the ABC story. It's that this parade of commentators throwing around words like 'idiot' -- starting with Chait at the TNR piece and continuing here -- are the real know-nothings.

This taxpayer behavior is not idiotic; it's evolved human behavior, in the presence of perceived unfairness, that may serve long-term survival strategies.

sqs• 17 years ago

Not necessarily. Maybe the lawyer values her time at $100/hr. Say she bills $150/hr to her clients. Then, before she reaches $250,000 she makes $105/hr (roughly). But for each extra hour worked after she has made $250,000 in a year, she only earns $80/hr. At that rate, she may prefer to spend time doing other things.

psadauskas• 17 years ago

I live in Boulder, and I'm looking for a new dentist. I know which one I won't be checking out.

aaronblohowiak3• 17 years ago

How is understanding of the tax code is a transferrable skill to dentistry?

tptacek7• 17 years ago

I don't know, but it may very well correlate:

http://www.ratemds.com/filecache/doctor-ratings.jsp?did=2075...

sangaya• 17 years ago

I'd reckon it has to do with the person's ability to analyze the facts of a situation and apply it to decision making. I wouldn't want a dentist to look at my teeth and incorrectly decide that a root canal should be performed when a more accurate analysis of the facts would suggest a simple filling.

In the Tax Code case the person should be intelligent enough to know that they don't understand the tax code rather than pretend they do and continue to make poor decisions because of it. This personality trait may lead them to fail to acknowledge a lack of understanding when it comes to a certain dental procedure, but rather than educate themselves, they go ahead and make an incorrect decision.

I think the skill of general intelligence does indeed transfer from tax code to dentistry.

rsheridan63• 17 years ago

If she's going to cut her hours to come in below $250,000, she probably wasn't looking for new patients anyway.

Macavity• 17 years ago

From the original article:

>Schatsky said that the incentive to get under $250,000 may be more so if the tax plan outlines that an individual who goes over a prescribed limit would face a reduced value of their itemized deductions.

>"If the value of all your itemized deductions goes from a 33 percent level to a 28 percent level than there would be a reason for people to do dramatic things to reduce their incomes," said Schatsky.

This is coming from "Gary Schatsky, a financial adviser and the president of N.Y.-based Objectiveadvice.com". As such, he presumably has a clue about taxation matters, so I hesitate to call him out on this, but... surely no government would ever enact such a scheme; they would bracket the deductions in a similar way to the income, rather than having a magic barrier of $250k, in order to avoid a situation where people have an incentive to earn less. To me this seems common sense, but at the same time, I'm not a financial adviser -- does anyone have any input on this?

russell• 17 years ago

"surely no government would ever enact such a scheme"

The UK actually had a 105% tax bracket back in the middle of the 20th century. Governments implement no end of stupid ideas.

I suppose there are marginal cases where your deductions at $250,001 are smaller than at $249,999, but I suspect the number needing drastic action are very few. That's why those better off than us hire accountants: to hide money under different rocks from last year.

ams6110• 17 years ago

> surely no government would ever enact such a scheme

Heh. I would not put ANYTHING into the "surely they wouldn't" category when it comes to government....

davidw• 17 years ago

Government? Try humans in general. Get a large enough sample, and there will be a portion of idiots. Sometimes they're even in charge, be it in a company or a government. Or they might not be in charge, but their actions will negatively affect other people in any case.

biohacker42• 17 years ago

This article is 100% politics.

I'm not saying it's a bad or good article, I'm just saying it's politics, this is HN, and I've flagged it.

vaksel2• 17 years ago

Noone that stupid would have the brains to make $250K a year to begin with.

All of these people are bullshitters. Pretty much on any site you visit you have someone claim that they are going to work less/close their business/shut down just to avoid hitting that 250K mark. Ever notice how its always a brand new member making such a post? The few times a long time member posted such drivel, it took a few minutes to find out that the person was full of shit.

time_management• 17 years ago

There are a lot of stupid people breaking $250k/year.

When you get out of school, you'll discover that the correlation between intelligence and income is low. There are dumbasses who succeed in investment banking on account of sheer stamina and frat-boy charisma. Also, real estate is a "profession" in which idiots thrive, because they are closer to the animalistic/territorial emotions involved in that game than smart people.

Finally, there are some people in prestigious careers (doctors, lawyers, and, yes, even professors) who are not low-IQ people, but are still idiots... and you'd be amazed how uninformed many of them are. Idiocy has a lot more to do with provincial attitudes and willful ignorance than an IQ score.

gcheong• 17 years ago

I remember once a manager telling a fellow employee that a raise isn't necessarily a good thing as the employee would end up paying more in taxes.

randallsquared• 17 years ago

This is a common thing to hear at entry-level hourly jobs.

shader2• 17 years ago

The problem is that the marginal value of the employee to the company is relatively low compared to the amount of extra in taxes they'd have to pay if they wanted to give that employee a raise.

It is often a much better idea for both the company and the worker to use some non-monetary compensation, because the benefit and cost fits within both of their marginal value curves. Otherwise the employee would only see a few more cents, and the company would be paying significantly more taxes (withheld) that they may not be willing to pay.

micks56• 17 years ago

1. What if there are tax credits for those earning less than $250k, while those credits are non-existent if you earn over $250k?

2. What if these people are trying to defer income to a later date when the income tax isn't as high?

3. Or the people can invest capital in their businesses now, get below the income tax increase by taking deductions, wait for the rate to decrease and then cash in on higher profits due to lower taxes and gains from investment in the business.

The dentist doesn't seem like an idiot to me. Maybe she never took much of a vacation before. Now she will. Then when tax rates decrease the incentive to work increases and she will increase her hours.

rm9993• 17 years ago

I'm surprised no one has picked up on this yet: families who make $249,999 may actually pay far fewer taxes than families making $250,000. Why? Capital gains taxes, which Bush set to 15%. Obama will increase this tax to 20% for families making >= $250,000 (http://www.google.com/hostednews/ap/article/ALeqM5jd7Vs2tjPA...). Also, all sorts of other possible deductions would be removed.

Wealthy families often make much of their money from investing, so a 5% capital gains tax increase can be pretty significant.

lasthemy1• 17 years ago

I think you're mis-stating how the capital gains rate will change, although that's the obvious interpretation based on the linked article.

Based on Wikipedia (which may be wrong, but at least explains it more clearly), the long-term capital gains rate will be 0% for those in the 10% income tax bracket, 10% for those in the 15% income tax bracket, and 20% for all others, meaning the discontinuity for joint filing happens around $65k. http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United...

rm9993• 17 years ago

I think you are referring to how short term capital gains are taxed, but I am referring to long-term gains (most investors stick with long-term gains to lower their taxes).

Long term gains are taxed at a flat rate. If you make N dollars in capital gains, you are taxed the same % on those N dollars. This % is determined by what tax bracket you are in, but is the same over all your gains.

That was my original point: Under Obama's plan, people who enter the highest tax bracket will suddenly see all of their capital gains taxed at a higher rate.

pibefision• 17 years ago

I live in Argentina. We know a lot about that.

gnaritas3• 17 years ago

> families who make $249,999 may actually pay far fewer taxes than families making $250,000.

That's not how tax brackets work. Jumping into the higher bracket doesn't mean you make less money, it means you pay more taxes for the amount above the bracket, but you'll pay the same tax rate on the 249k as the guy only making 249k. So he'd only pay the 20% rate on the extra dollar, hardly far more than the other guys.

rm9993• 17 years ago

Notice that I'm talking about capital gains, not income. They are taxed differently.

A family making 190,000 dollars a year in normal income and 50,000 dollars a year in long-term capital gains will pay the normal taxes on 190,000 dollars (as you describe it, with brackets and what-not), and 15% on the 50,000 dollars. A family making 200,000 dollars plus 50,000 in LTCG, however, will break the 250,000 dollar barrier and will have to pay 20% on that 50,000. That means the cost of that extra 10,000 dollars in income cost them 2,500 dollars in additional taxes.

jess• 17 years ago

OK, all you smart guys, we know what a marginal rate is. It is still the case that any entrepreneur will have less incentive to earn that 250,000th dollar than she did to earn the 249,999th dollar. Maybe this isn't "rational", but it is empirical: there do exist entrepreneurs who will decide not to earn that 250,000th dollar. Maybe that means they'll each sell one less widget, but it also implies that some of them will lay somebody off. Business decisions are not continuous, and they are extremely path-dependent. A small change in circumstances (not 4 cents, but the analysis holds if someone decides to make $270K rather than $310K) can lead to very divergent results.

Of course, our income tax system (not payroll or sales tax!) is already quite progressive, so this was already the case. Also, if you believe in utility functions, you can imagine that the 250,000th dollar is intrinsically less alluring anyway. But Obama wants to make the system yet more progressive, so no one will be surprised when these effects increase, with negative knock-ons for jobs and growth. It isn't as though business owners have nothing better to do with their time than provide jobs. Few of them will close up shop, but all of them will reevaluate their workload. When they're not getting paid enough for their work, they'll do less of it. Actually, I think most of us plebes are basically the same.

anewaccountname2• 17 years ago

>Maybe this isn't "rational", but it is empirical

Actually it is perfectly rational; it just doesn't have as much to do with with a progressive tax as you might think: http://en.wikipedia.org/wiki/Marginal_utility

tlrobinson• 17 years ago

Fiscal Darwinism?

ckinnan• 17 years ago

The tax code is an outrage. The sad thing is that we waste 22 cents in compliance and complexity for every dollar raised for the treasury from the income tax. Obama's plan makes the complex code even worse, increasing the deadweight loss to our society.

http://www.taxfoundation.org/news/show/1281.html

Dilpil• 17 years ago

This is not an argument for 'simplifying' the tax code, if anything, it should be complicated. Using a discrete cutoff point, while easier to explain to voters, is far more gameable than using say, a logarithmic scale.

rsheridan63• 17 years ago

The subjects of this article never said anything that implies that they don't know what a marginal tax rate is. It profiles a lawyer and a dentist, two professionals whose pay is in proportion to the hours they put in, who have to decide when the marginal value of more money is less than the marginal value of more free time. Naturally, there will be a cluster of people who decide that the tax bracket change point is the right place to do this - more so the larger the difference between the two brackets.

Or, to use the tone that the author used, this idiot author is so stupid that he doesn't understand the concept of marginal utility...

steveplace• 17 years ago

The ABC article is based on the premise that an individual's entire income is taxed at the same rate. If that were the case, it would be possible for a family earning $249,999 to have a higher after-tax income than a family earning $255,000, because the family earning $249,999 would pay a lower tax rate.

But that isn't actually how income tax works.

In reality, a family earning $255,000 will pay the higher tax rate only on its last $5,001 in income; the first $249,999 will continue to be taxed at the old rate. So intentionally lowering your income from $255,000 to $249,999 is counter-productive; it will result in a lower after-tax income.

From here: http://mediamatters.org/countyfair/200903030013

There really are people planning to reduce their income to get below Obama's $250k bracket

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