Marginal Tax Rates and the Middle Class
[Guest post by DRJ]
Robert Carroll at the Tax Foundation compares the candidates’ tax plans and notices a difference between the statutory tax rates Obama’s plan promises and the effective marginal tax rates his plan will actually produce:
“To the surprise of some, even though Senator Obama’s tax plan lowers taxes for the bottom four quintiles, marginal tax rates would fall only for the very lowest-income couples. Taking both income and payroll taxes into account, those at the very bottom of the income distribution would see their effective marginal tax rates fall from 27.4 percent to minus 58.6 percent due to proposed changes to the earned income tax credit and Senator Obama’s new “Making Work Pay” credit.
Most low- and moderate-income couples would see their effective marginal tax rates rise, in some cases, significantly. Indeed, some low- and moderate-income taxpayers will see their marginal rates rise to more than 50 percent.“
Here’s an example:
“The combination of the phase-out of the EITC, the “Making Work Pay” credit, and the child and dependent care credit pushes the effective marginal tax rate to as high as 51.7 percent. That is, the taxpayer who benefits from all these provisions at a lower income discovers that he gets to keep less than one half of every additional dollar of earnings in the roughly $30,000-to-$43,000 range.“
That should wake up blue-collar voters. Too bad no one will tell them.
— DRJ
So basically, if you make from $25k-$75k and $105k-$130 or so, you’ll get a hike. Everyone else stays the same except for the people who don’t likely pay anything, they’ll get money back.
This is his tax cut for 95%?
CW Desiato (614aa7) — 10/10/2008 @ 10:49 amTo clarify, I was referring to Obama’s plan.
CW Desiato (614aa7) — 10/10/2008 @ 10:50 amCW,
It looks that way. In addition, based on my experience with the current Earned Income Tax Credit, most low-income workers are already getting money back — indeed, more than they pay in taxes. Under Obama’s plan, the lowest paid workers will get a lot more money back, courtesy of American taxpayers who make as little as $30,000 a year.
DRJ (c953ab) — 10/10/2008 @ 10:54 amWhy?
I think you are deeply misrepresenting the point of this article.
The article indicates something like this is going to happen (all numbers below completely made up and for example only).
If you make $28,000 you qualify for the EITC. The EITC will give you an extra $500.00, under current tax law. Obama wants to expand the EITC so that instead of $500 you get $1,000.
If you make $29,000 the EITC starts to phase out, so you get only $250. Obama wants to expand the EITC so that instead of $250 you get $500.
The marginal tax rate increase refers to the process by which if you move up to making 29,000 before the EITC from $28,000 before the EITC your total income increases less than 1,000 because of the phase out. As per the example under current law if you made $28,000 the EITC meant you actually made $28,500 whereas if you made $29,000 you actually made 29,250 — An increase of $750. Under the Obama plan if you went from $28,000 to $29,000 the Obama EITC would make that actually an increase from $29,000 to $29,500 — An increase of only $500 (and therefore a higher marginal tax rate; from 25% to 50%).
TomO (2fd42a) — 10/10/2008 @ 11:15 amStill unless you would rather have $29,250 than $29,500, you are being helped by the Obama plan.
No reason why blue-collar voters should object.
No reason why blue-collar voters should object
Other than the fact that they’re buying into a lie.
Another Drew (e6d3fc) — 10/10/2008 @ 11:21 amNothing to see here…
Move along now!
TomO,
That may be true up to $30,000 (as in your example) but the point is what happens to taxes on income above $30,000. Would you be happy to know that out of every dollar you earn between $30,000-$43,000, half of it goes to the government?
DRJ (c953ab) — 10/10/2008 @ 11:23 amThis is the same-oh, same-oh we got from the Dems in ’92, when the Middle-Class (whatever they are) were promised a tax-cut, and awoke in ’93 to find that they, and Soc-Sec recipients, were handed a tax-increase.
Remember, to a Democrat in DC or other positions of power,
Another Drew (e6d3fc) — 10/10/2008 @ 11:25 amthe Rich are anyone with a job!
TomO–
Look at Figure 2 in the referenced article. You’re exactly right–if you make between $29k and $30k per year you get a significant tax cut. However, if you make between $33k and $67k per year, you get a tax hike.
The average annual income for Americans is around $40k. At that income level, you’re looking at a 12% tax increase, or $4800 for a family of four. That’s a significant chunk of Change for a blue-collar worker, and I’m fairly certian he or I would object to it.
Joel (6e7bf5) — 10/10/2008 @ 11:30 amEconomist’s View. “Obama’s Tax Plan and Basic Honesty”
If people within a given bracket continue as they are they will be able to keep more money under the Obama plan. The criticism has to do with incentives for future work.
Nanker Phelge (5e116b) — 10/10/2008 @ 11:33 amOne of the biggest problems about these tax issues exists in Tom’s post. No offense about the content, Tom but reading that is all but incomprehensible. It really is. Granted, I may be a dumb piano player but that is just about the most unintelligible mess of numbers and acronyms I’ve seen since April 15th.
It’s almost as if our ruling class doesn’t want for us to understand this. You’d think they deliberately put election day as far away from tax day on purpose (they did).
And all this is done in the name of “fairness?” Bullshit. It’s not fair to have to spend the silly amount of time it takes to prepare your tax return; even if someone does it for you. It’s not fair to live in fear of an audit.
Again, no offense to you, Tom. I know you attempted to make your point comprehensible and I appreciate it even though I don’t find your argument convincing.
CW Desiato (614aa7) — 10/10/2008 @ 11:44 amDRJ, No.
TomO (2fd42a) — 10/10/2008 @ 11:44 amThe numbers are made up, but the point is the same across different number scales. According to the methodology of the article, in my example, when I went from $28,000 to $29,000 I paid a marginal tax rate of 50%. But I still made $29,500 which is better than $29,250.
To carry the example further, say at $30,000 the EITC phases out completely. So now when I go from $28,000 to $30,000 (pre current EITC) I go from $28,500 to $30,000. Under the example Obama plan when I go from $28,000 to $30,000 (pre Obama EITC) I go from $29,000 to $30,000.
You are reading it as if when I start earning $30,000 I pay a 50% tax, but what is happening is that when I start earning $30,000 – I stop receiving a $500 bonus – which is completely different.
Under the Obama plan discussed in the article and the example your take home pay at 30,000 is 30,000. Its just that your take home pay at 29,000 was 29,500 and at 28,000 it was 29,000. But in no way are you worse off under the hypothetical Obama plan than you were before.
Now, if you want to be like Another Drew and simply believe that Obama is lying you are welcome to do so — but thats a different argument. Regardless, I think most people were pretty happy with their take home pay during the Clinton era and would gladly have it back.
Fixed that for you.
CW Desiato (614aa7) — 10/10/2008 @ 11:44 amDRJ, Thank you for putting the link in for The Tax Foundation article! It’s very technical, but definitely helps me understand how the two plans differ and how they will affect me. It’s interesting that the foundation is non-partisan…and, yet, the article stabs so many holes in Obama’s plan that it looks like swiss cheese!
yourlilsis (095089) — 10/10/2008 @ 11:47 am… Another Drew … simply believe that Obama is lying…
No, I don’t believe that Obama is lying…
I know he’s lying!
Another Drew (e6d3fc) — 10/10/2008 @ 11:49 amThey (Libs) always lie about taxes!
This gets me too. It’s not a $500 bonus. It’s $500 of my money that I GET TO KEEP. It can be beancounted any number of ways but it’s still MY MONEY. NOT the gummint’s. I don’t care how it’s dressed up as “credit” or “bonus” or “relief”, it’s MY money.
The people who fall for it being a “credit” are the same people who depend on a tax refund as a payday.
Not I. There was no more hostile tax environment for self-employed, single people living in California during the Clinton years. I had many five-figured tax bills to support that. Even though now I make more and am married, I haven’t had anywhere _close_ to that sort of tax liability in…let’s see…eight years.
CW Desiato (614aa7) — 10/10/2008 @ 11:52 amJoel you are confusing tax increase with marginal tax rate increase. The article is discussing you receiving less of a benefit.
TomO (2fd42a) — 10/10/2008 @ 11:55 amIf you are making under $150,000 you are getting a tax cut, you will pay less in taxes in total dollars.
If you are making a figure close to, but above, one of the tax credit phase outs then you are still paying less in total dollars than you would be under current law. All that is happening is that someone who is near to, but bellow, one of the the tax credit phase outs is getting a bigger cut than you are. Hence the difference in take home pay between the two of you is getting smaller.
But since you are still better off in total dollars, I don’t see why you would object.
TomO,
I need you to explain (again) why you apparently believe the Tax Foundation study is wrong regarding the impact of Obama’s tax plan on marginal tax rates.
If your point is that the EITC has a dramatic effect on the bottom-line rates taxpayers pay (and, if so, I agree), then why will any taxpayers who earn $30,000-$43,000 a year be better off with Obama than under current law? As I read it, the Earned Income Tax Credit thresholds currently go up to $41,646 for a married couple filing jointly with two or more qualifying children. It will apparently end at $30,000 under Obama. As I understand it, people making between $30,000-$40,000 will not get any EITC. Have you factored that in?
DRJ (c953ab) — 10/10/2008 @ 12:11 pmWhat in heaven’s name makes anyone think that Obama would stick to his tax plan if elected? When asked at the debate what cuts he would make in light of the bailout, he couldn’t name one. He just listed programs that he has to have. How will those programs be paid for?
Obama’s promise on taxation: I’ll tax the other guy and hand the proceeds over to you.
MartyH (52fae7) — 10/10/2008 @ 12:12 pmObama is Clinton redux – same BS regarding the mythical “middle tax cut,” but once in office the mood will quickly change to “what? Huh? Who ‘dat?”
Nice to see the ever – popular Wanker Fudge making another (fully ignorant) appearance.
Dmac (cc81d9) — 10/10/2008 @ 12:17 pmI am very surprised that I have not seen more discussion on the 1997 Taxpayer Relief Act.
Despite home prices tumbling, many of us have homes with considerable equity and unrealized profit from when we bought.
Now we are allowed a profit of $500,000 on our primary residence that is tax free—after holding for 2 years.
Now come on, I would bet stacks of money that Obama and the Dem congress will grab that, as they surely see it as low hanging fruit. And they will justify the grab by trying to pin blame on this mortgage crisis to that tax relief.
I’m surprised McCain hasn’t made this an important issue during the debates. It surely impacts so many of us.
PC14 (ec0516) — 10/10/2008 @ 12:26 pmTomO,
Come to think of it, I don’t know at what income the EITC completely phases out. I thought it phased out at the maximum income cutoff point shown at the EITC link I gave above, but maybe some taxpayers who earn more than $41,646 get a reduced credit.
Do you know where the EITC phases out and where it would phase out under Obama’s plan? The Tax Foundation link suggests it happens at $30,000.
DRJ (c953ab) — 10/10/2008 @ 12:32 pmDRJ-1) in connection with your last question (#21), the EITC isn’t for everyone who earns under a certain limit. If you get too much income from interest and dividends, you are not allowed to get it. So it’s for people who have low incomes and not very much money in the bank. (It is therefore a counterincentive to savings, but that’s another topic.)
kishnevi (4cc556) — 10/10/2008 @ 1:03 pm2)–I have to suspect the article of some hanky panky with the numbers. To be precise, from note 3 at the very end:
It was also assumed that the taxpayer bears both the employee and employer share of payroll taxes. The calculations also account for the deductibility of payroll taxes for business tax purposes.
That seems to be saying that the calculations include the portion of Social Security tax paid for by the employer as tax paid by the employee (first sentence) but then that they don’t (second sentence). Leaving me somewhat confoozled and suspectious.
Or can anyone else explain what that little piece of gobbledydook means?
The use of the credits do create an extremely high marginal cost, as the phase out of the EITC can effectively result in a 40-50% effective marginal rate.
A very similar event occurs with social security benfits. For those retirees that work and have earnings exceeding the annual limitation whereby their SS benefits get reduced, the efective marginal rate on earnings can be as high as 80-90%.
As a policy matter – having such a large percent of the voting population off the income tax or payroll tax rolls eliminates any incentive on their part to have a fiscal responsible attitude with respect to government policy.
Joe - Dallas (d7c430) — 10/10/2008 @ 1:06 pmDRJ, I don’t think that the tax foundation study is wrong. I just think you are misreading what it says. According to Wikipedia, in 2007 the EITC is completely phased out for a family with 2 kids at $37,783 (it starts phasing out at $15,400). The article doesn’t indicate that Obama would change the phase out period, just that he would increase the benefit.
TomO (2fd42a) — 10/10/2008 @ 1:12 pmIn short:
People making under aprox. $30,000/yr get a bigger benefit from Obama’s plan.
People making slightly more than that are unchanged. (by this provision – the article doesn’t go into the rest of the plan, nor do I understand it well enough, but Obama’s plan doesn’t increase rates for anything below 200,000 individual/250,000 for family)
Because the benefit to the poor has increased people making more than aprox. $30,000 are richer than people making less than $30,000 by a smaller amount – which you could call a marginal tax rate increase. But they are still making the same take home pay (or more), so they aren’t being hurt by the plan.
This is a nice academic exercise, of course, but that’s all it is, because it bears no resemblance to reality. The very simple fact is that, if elected, Barack Hussein Obama will not press for any tax cuts at all, but will simply let the 2001 and 2003 tax cuts expire. That way, the Democrats get a big tax hike, without the bother of having to actually vote for one.
Mr Obama learned the lesson of 1984 well; Walter Mondale was honest about his intention to raise taxes, and he carried one state. Bill Clinton showed the New Democrat way, by promising a “middle-class tax cut,” but having absolutely no intention of having one, as was evidenced by the fact that the proposed tax cut was abandoned after he was safely elected, but before he was even inaugurated.
THe answer is that we’ll all get a big tax increase, and The Chosen One will justify his regretful abandonment of his tax cut proposals on economic necessity; we just can’t afford them, don’t you know? And since President Bush and the Republicans didn’t get the job done of making the tax cuts permanent, the Democrats don’t have to actually do anything to get their tax increase.
Well, being the obsessive-compulsive type, I ran my 2006 and 2007 income through a year 2000 Form 1040; thanks to the 2001 and 2003 tax cuts, I saved $12,905 over those two years in federal income taxes. I am absolutely certain that I’ll see a multiple thousands of dollars tax increase in my tax bills — even though, as someone making less than a quarter-million dollars, Mr Obama has promised I wouldn’t see my taxes go up a single penny — if our country is just plain stupid enough to elect Senator Obama.
The over-taxed Dana (3e4784) — 10/10/2008 @ 1:12 pmDana is right, of course, but I like academic exercises on (very) rare occasions.
TomO – Thanks and I think I understand your point now. I still think it will be small consolation to taxpayers making $30,000-$43,000 a year to learn that, while they may not be paying at a higher tax rate, they will lose their EITC and won’t get any other tax breaks Obama promised Americans making under $30,000 a year.
DRJ (c953ab) — 10/10/2008 @ 1:24 pmTomO, the trouble with the Obama Tax Plan, as you describe it, is that it does not compel the poor to get richer (?) on their own and, paradoxically, does not compel the more fortunate to feel grateful for being made less fortunate by government (Joe Biden “patriotism”). Being rich or poor has little to do with money, as the Founding Fathers understood, but which socialists obsess about obsessively. You American born socialists will not bring increased prosperity upon America with your taxes, but just another form a of European “prosperity” envy that has historically plagued that Continent. You’ve obviously never been to the poor section(s) of Paris. US “poverty” is wealth by comparison.
C. Norris (c06b47) — 10/10/2008 @ 1:27 pmOver taxed Dana – Your savings of $12k per year should be adjusted downward slightly due to the indexing of the various exemptions, standard dedcution and tax bracket adjustments. After adjusting for the inflation indexing, etc, your effective tax cut was probably in the $5-6k range. still a good reduction, just not as high as advertised.
Joe - Dallas (d7c430) — 10/10/2008 @ 1:30 pmBut DRJ, they lose the EITC at that rate now – and its not like McCain is proposing that the EITC phaseout be changed. So why would they care? Do they just hate giving benefits to the working poor? I don’t understand what you think they need to be consoled for.
TomO (2fd42a) — 10/10/2008 @ 1:32 pmThe big problems are two. One, the vast majority of tax revenue comes from the middle class. Two, FICA is the big tax on the middle class. Those two items make a middle class tax cut an empty promise every time it is made. David Frum has written about the plight of the middle class and I agree with him that it is an issue for the Republicans to solve in the next decade if they wish to return to power. One way is a national health plan that is not a nightmare of bureaucracy (the French plan). All those people counting their Obama tax “cut” are actually collecting welfare.
This is an odd year or there would be no chance for McCain. Somebody like Dick Gephardt would probably even get my vote but the Democrats won’t nominate sensible Democrats anymore. Gephardt, by the way, was co-sponsor of McCain’s bill to try to rein in corporate welfare a few years ago. Those responsible Democrats are gone.
The MSM is doing everything it can to conceal the weirdness of Obama as a candidate.
Mike K (f89cb3) — 10/10/2008 @ 1:33 pmSo why would they care? Do they just hate giving benefits to the working poor?
Of course – don’t forget, only the rich get socialism in Republicanland.
Phil (6d9f2f) — 10/10/2008 @ 2:03 pmY’all need to take a break from your math and translate Politicish(LiDemo dialect).
Liberal Democrats refer to a spending Cut as a reduction in a planned spending increase ($1 Billion increase requested, $500 million granted = a 50% Cut)
Obama promises a tax Cut.
Obama is a Liberal Democrat.
THEREFORE, he will raise taxes less than planned!
Teflon Dad (4ed3d2) — 10/10/2008 @ 2:04 pmTomO,
I think taxpayers would/should care for 2 reasons:
1. If they currently make between $30,000-$41,868, they will go from a decreasing EITC to no credit. It may not seem like much to you but I bet every dollar counts to them.
2. Obama promises that his tax plan has no tax increase and implicitly represents that everyone making under $250,000 gets treated the same. It turns out that’s not quite true because people making under $30,000 get more perks. Maybe everyone would agree that’s fair but I’m not so sure someone making $33,000 would agree as quickly as someone making $333,000.
DRJ (c953ab) — 10/10/2008 @ 2:44 pmDRJ–for clarity, I think we had better keep in mind that the figures in the article were talking about a joint income. So it’s one couple making a combine $30k, and not one person making $30k by themselves, which sweeps a whole lot more people into the above $30k range.
kishnevi (fbc22c) — 10/10/2008 @ 2:50 pmGood point, Kishnevi.
We’d have to use 500-word sentences to accurately state the issues involved in most tax-related problems. That’s one reason I’m glad I’m not a tax lawyer.
DRJ (c953ab) — 10/10/2008 @ 2:58 pmtax lawyer
Is it true that IRS regulations require that tax lawyers stand in front of IRS agents when the revolution begins?
Another Drew (e6d3fc) — 10/10/2008 @ 3:01 pmDRJ, the only complaint that people making $30,000-$41,868 could make is that people who make less than them don’t make as much less as they used to.
“The poor are catching up to me!”
But you’re not going any slower, so what’s the problem?
Other then that the issue is incentives, but that wasn’t the subject of this post
Nanker Phelge (7605c7) — 10/10/2008 @ 3:07 pmDRJ – If I read this correctly, this analysis includes payroll taxes. I would be curious to see how theses figures would, or would not change, if it just accounted for income taxes.
JD (f7900a) — 10/10/2008 @ 3:32 pm“One, the vast majority of tax revenue comes from the middle class.”
Mike K – Really?
daleyrocks (d9ec17) — 10/10/2008 @ 3:35 pmI predict Prez Obama will get on the TV and reneg on his tax cut promise quicker than Billy Clinton did. He may not like Hillary, but he loves her hubby’s plan.
Beware of Dems Promising Tax Cuts
Patricia (ee5c9d) — 10/10/2008 @ 5:13 pmComment by daleyrocks — 10/10/2008 @ 3:35 pm
This is true when including FICA, which impacts the working-class poor severely, who pay more in FICA than they do in FIT.
Also, many of these studies take the viewpoint that all FICA, whether employee or employer paid, is in fact, employee paid, since this is a total cost to the business of your employment.
Another Drew (e6d3fc) — 10/10/2008 @ 5:29 pmI am not completely convinced that a change in the manner of deducting FICA would find this part of it included in the proverbial “pay envelope”, having known too many employers who still resent this intrusion into the labor market-place by the Feds.
DRJ:
1. Makes no sense. Obama doesn’t change the rate at which the EITC phases out. So they either get EITC now in which case they will get more, or they don’t in which case they stay the same.
TomO (0b00d6) — 10/10/2008 @ 8:11 pm2. Obama doesn’t promise that everyone gets treated the same. He promises that everyone making under 150,000 will see there taxes go down. He simply has more credits for people making under 30 than people making merely under 150,000. Your right if you make 333,000 and thus are in the top 1/2 % you are going to see an increase. If you want to make a case against that do so. Personally, I don’t think that is where tax relief should go at the moment, but at least that is a case you can make.
TomO – Did you ever even address DRJ’s example of people making between $30,000-$40,000 or just brush it off? You made a comment about people earning income near the edge of brackets, but I don’t recall seeing you refute DRJ’s specific example. Without that, your global point is completely invalid.
daleyrocks (d9ec17) — 10/10/2008 @ 8:22 pmdaleyrocks, note I didn’t write “income tax.”
The top 10% pay 68% of income tax revenue.
10. Does the tax distribution look a lot different if we factor in other federal taxes, such as the payroll tax?
It’s true that the distribution of taxes is somewhat more equally divided when payroll taxes are accounted for—but the change is surprisingly small. Payroll taxes of 15 percent are charged on the first dollar of income earned by a worker, and most of the tax is capped at an income of just below $100,000. The Tax Policy Center, run by the Urban Institute and the Brookings Institution, recently studied payroll and income taxes paid by each income group. The richest 1 percent pay 27.5 percent of the combined burden, the top 20 percent pay 72 percent, and the bottom 20 percent pay just 0.4 percent. One reason that the disparity in tax shares is so large is that Americans in the bottom quintile who have jobs get reimbursed for some or all of their 15 percent payroll tax through the earned-income tax credit (EITC), a fairly efficient poverty-abatement program.
While the top 20% pay 72%, the share of income is greater for the middle quintile.
Mike K (2cf494) — 10/10/2008 @ 8:28 pmThis is profoundly incorrect.
How much in income taxes does someone making under $30,000 pay?
daleyrocks – The Leftists cannot discuss taxation without class warfare and the use of redistribution of wealth, which is just more “fair”.
JD (f7900a) — 10/10/2008 @ 8:30 pmMike – You wrote tax revenue. The thread is about income taxes. Are you suggesting your comment was inclusive about things like cigarette and gasoline taxes?
As you acknowledge with you later clarification, with respect to income taxes, the burden on the upper brackets is already disproportional.
daleyrocks (d9ec17) — 10/10/2008 @ 9:02 pmJD – I would rather have the left focus on improving the economic lot of the bottom quintiles through their platforms rather than by taking away income from other people.
The Democratic Party has truly become the party of the rich when you consider their policies on immigration and energy. How do open borders and higher energy prices benefit benefit the poor and middle class? What is the Democratic Party argument for those positions?
daleyrocks (d9ec17) — 10/10/2008 @ 9:06 pm