A journalist’s income tax flub, a society’s blind spot
There is a small-scale tempest underway in the blogosphere right now over an error that popped up in a recent article in USA Today about taxation.
In that article, now corrected, reporter Gregory Connolly argued the following:
“That raise actually might not be as good as it looks. The extra money is nice, but it could very well bump you into the next tax bracket, possibly leaving you with less money than you had before the raise.”
Sounds like common sense, right? And you hear this all the time around the water cooler: Why work harder and earn more if it only bumps you into a higher, more punitive tax bracket?
Why scrap and invest and take risks, if it only puts a bigger IRS target on your back at tax time?
The problem, of course, is that this isn’t how American income taxes work at all.
Our Federal system uses “marginal” tax brackets, which means that only the income above each threshhold is taxed at the higher level.
Here’s an explanation from the Center for Economic and Policy Research:
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.
This particular journalist’s flub in USA Today would be no big deal except for one thing.
Widespread ignorance about how America’s tax system works — and doesn’t work — leads to a remarkably skewed conversation about the ways we fund our government. Too much of the conversation is political and ideological, not factual.
Which is worrisome, because bipartisan efforts to “simplify” and “reform” the tax code are likely to shift the tax burden in ways that few reporters — and few voters — actually understand.
It’s also likely that inaccurate notions about income taxes will shape the debate over tax hikes, especially on higher-end wage earners.
So here’s my question to you: Whatever you think ideologically about the income tax, how much do you actually know about how it works? And how much do you know about the way it affects your family and your pocket book?
Comments welcome below.
Rich people don’t pay enough in taxes.
Seems to me that 40 years ago it was true that you could get bumped into a higher tax bracket and lose money. Back then there were lots and lots of brackets and you looked it up in a booklet you got from the post office. At least it was generally believed that you could get bumped up. I dont think that has been true since the Reagan years.
The current misconception that bugs me the most is the statement that “50% of Americans dont pay any taxes”. (meaning the poor dont pay enough).
Bush’s fault: Everybody likes a free lunch. Nobody likes to pay taxes. But people used to accept it as the price to pay for living in a civilized society rather than in another Somalia.
Typical liberal slant… always biased toward those elitist facts.
It bothers me not at all that the lowest income levels don’t pay income taxes. What does bother me is the system of refundable tax credits built into the system which allows non payers to file for and receive “tax refunds”. I have no problem with government assistance to the needy but I do not believe that income taxation which is intended to fund our government should be used as a mechanism for income redistribution.
I would love to be rich enough to pay more taxes than I do.
I would bet there are a lot of people who now have their hands out, looking for money from the government because of flooding but who also want their taxes lowered.
There used to be a cartoon in the Sunday papers called “They’ll Do It Every Time” by Jimmy Hatlo. I remember one where a bunch of guys were leaving a poker game and all of them were complaining about how much they had lost. The narrator character down in one corner was asking “So who won?”
The current economics remind me of that cartoon except that the “winners” are obvious, the corporations and the rich are wallowing in cash like Scrooge McDuck in his money bin but to hear them talk (except for Warren Buffet) they need further tax cuts and reduced regulation to survive.
IMO Those who benefit disproportionally from the economy should expect to contribute disproportionately. If that means raising their tax bracket, then so be it, no matter how it works. If I could make $201K I’d gladly pay the taxes.
Brian M. As a retired tax preparer I agree with you wholeheartedly that the ignorance of the public and journalists about how tax brackets work is rife and harmful. As I often told my clients, until they pass a law that taxes at 100% there is NO WAY that you can pay more tax than the money you earn!
A flat-tax and a transparent taxing regime would eliminate this debate.
Then the only question would be what percentage is neededto fund what we all agree is the necessary responsibility of government.
If you think there would be an end to the tax debate with a flat tax you are dreaming.
A flat tax without any deductions?
If we are to keep some deductions and eliminate others, which would stay and which would go?
A flat tax starting at a certain income level or all incomes, even an income of $1, would be taxed at a certain rate?
Let the fun begin.
Tourpro, flat tax sounds great until you ask yourself the question, Why should Warren Buffet and his secretary pay exactly the same rate? Granted, it would be an improvement over the current system, where Buffet pays a lower rate than his secretary does, but why not scrap ALL the deductions and loopholes but keep the progressive tax rates?
This post is directly related to interesting parallel discussions at Brian (MOFYC’s) blog (http://mofyc.blogspot.com/2011/08/failing-circulation-forces-newspaper.html#links) and Will Doolittle’s blog at PostStar.com (http://poststar.com/blogs/i_think_not/i-d-rather-live-in-reality-thanks/article_0ddb3542-d8ee-11e0-91a0-001cc4c03286.html?mode=story) on how staffing cutbacks have affected journalism. The bottom line: fewer seasoned reporters covering the news with less and less of a support staff (editors & proofreaders) to exert quality control. That growing news hole in your paper will inevitably be filled by an expanding corrections and clarifications column.
Walker. The flat tax would guarantee that Buffet and his secretary would only pay tax at the same rate up to the limit of his secretary’s income. After that Warren is on his own.
The problem isn’t just that the public doesn’t sufficiently understand our tax system; it is compounded by politicians, conservative think tanks and entertainment news media like FOX that deliberately distort information about taxes to support their ideological agendas.
Myown, thanks for bringing this back to the article. To answer its closing question, I have always understood that the tax brackets worked smoothly, without sudden steps that could make it worthwhile earning a few dollars less– all you have to do is sit down with the tax tables and a calculator for three minutes and you will see that that is true. And consequently I’ve always been baffled at people talking about trying to avoid getting to the next higher bracket. Maybe more people should do their own taxes.
The reason for the obfuscation is that simply saying you think the rich should pay less taxes and the poor to pay more taxes but get fewer benefits might not go over too well.
I agree that our tax system is too complicated. Each year I seem to spend (waste) more time doing my taxes… this form, that form, this deduction, that deduction… or paying someone to do it for me. It is all frustrating and silly.8
I also agree that those who earn more should pay more.
These two ideas are not mutually exclusive.
Simplifying/reforming the tax code does not have to shift the burden of taxes at all.
A simplified tax code does not need to be a flat tax code. You can have a progressive (income bracket) tax system that would be simple enough to fit onto a flash card.
To me, the point is that journalists should strive to write accurate stories. To do that they need to fact check. I have to fact check my presentations all the time. It’s part of the job. Why should I bother purchasing and reading a newspaper if it’s full of mistakes?
“Widespread ignorance about how America’s tax system works — and doesn’t work — leads to a remarkably skewed conversation about the ways we fund our government. Too much of the conversation is political and ideological, not factual.”
Truer words have seldom been said. It’s often interesting to talk to people who complain about their taxes being too high. What many of these people often don’t realize is a lot of their income is exempt from taxation (employer health insurance benefits, employer retirement contributions, gain from sale of a home, gifts, etc.).
Great post, Brian. Thanks for this.
I couldn’t agree more that we need tax reform at both the federal and state level. What I’d like to see is an actual long-term study on a national sales tax compared with our current income tax system. I’ve always thought it odd that we tax income. Why not tax our consumption rather than our income? It would certainly make consumers all the more conscience of the useless crap we purchase and might actually generate more revenue in the long run. It would seem to me that it would be far simpler and less susceptible to special interest and political manipulation. Of course we wouldn’t need accountants, tax attorneys, etc….Which is why they’d lobby against such a plan.
Guess the guy thumbs-downing praise for this column loves inaccurate reporting.
Who are all these crazy people that don’t want to make more money?? I think there is a serious flaw with some of the basis for this blog.
Paul, where is anyone saying they want to make less money? It seems to me that some people in this country are making such obscene amounts of money that it is perfectly reasonable to expect them to pay substantially more in taxes than folks who are just getting by. What’s crazy about that?
The thing is though leisure is worth value, at least to me! So being put in a higher tax bracket at the margin may indeed not be worth the effort.
If your next 10,000 dollars is taxed at 40% you may decide it is not worth the extra time money and work to earn that next 10,000. This does happen it is real.
So the journalist was technically wrong you won’t pay more in taxes overall, but indeed you may decide to forgo the extra effort if the money you make by that extra effort is not worth the effort.
So what does that do to society at large if many people decide to forgo that extra effort as it is literally not worth it?
Mervel, look, we had a MUCH steeper graduated tax structure in place in the 1950s with a 90% top bracket and it didn’t stifle individual initiative and growth. The difference now is that we’re no longer investing in infrastructure– government spending is being strangled, and the private sector is sitting on gigantic piles of cash, or spending their cash overseas, or using it to buy other companies in an effort to establish monopolies. They got hooked on the easy money of the bubble, and they can’t give up hoping for more of the same. What we need is productive investment.
Mervel said: “So the journalist was technically wrong you won’t pay more in taxes overall,”
And that’s the whole point of the blog post. End of sentence. You can speculate on people’s motivations in higher brackets (and at my income, all I can do is speculate–if I liked my job, a higher tax rate wouldn’t stop me from working more in the least), but you can’t speculate thoughtfully if reporters are dishing out outright falsehoods.