[UPDATE] Please read the end of the diary for an update related to the 3.8% tax on investment income[UPDATE]
I used to wonder how people could be so stupid as not to understand letterboxing of a movie on TV . Even if they did not know the various aspect ratios, it really boiled down to "if you noticed this wide rectangle in the theater, how the hell did you think the same image would be a squarish on TV"(back in the non HD days). It's the same pet peeve I have when a car salesman tries to sell me a car by framing it in terms of monthly payments than the actual cost of the car and the interest rate of the loan.
So maybe I should not be surprised that many people are ignorant of how tax rates work. Maybe, it's because most people rarely get to that highest tier to make the connection that every marginal tax tier share the same basic principle that the portions of income you earn that fall into the lower tiers get taxes at that rate? Or do they shut down their brains once they match their net income next to the tax amount in their IRS tax tables? Or just let the software do all the work and not worry about how it's done.
It is in the republican party's interest to have a country misled on how taxes work. I noticed this massive ignorance in the country a few years ago and identified it as a problem the democrats need to eliminate because it gives people the wrong impression of raising taxes on higher marginal income tiers. But 4 years later, democrats give long winded answers on how his policies in general are better for small businesses. He could give a 2 minute easy to understand counter example. And this cycle of misinformation by the republicans will continue in future election until the Democrats take it upon themselves to put out creative ads illustrating the concept of a marginal tax rate and net income vs gross income , marginal costs for business versus projectted marginal revenue. (Sorry if I don't use the proper technical terms here).
I am not an accountant. I had a small S Corp inthe past and even I know some basics of tax rates. I put a diary out on Dkos a while ago because I noticed a massive ignorance in the leadup to the 2008 election on how marginal tax rates worked. I do know what the basic concept is which as most of you know boils down to you still paying the same amount of taxes as anyone else on taxable income for each of the tiers(OK, I am deliberately making it simplistic here).
Same with spending as a small business owner. You won't refrain from hiring/purchasing if the cost of adding that employee or equipment is offset by higher revenue. In fact, if you anticipate higher revenue in a given year and you think you will need to make some purchases anyway, you might accelerate some of your future spending into the current quarter to take advantage of deducting those expenses.
EDIT: Now I realize there are bound to be a few people that find the 4% increase would change their mind about wanting to earn that extra dollar above 250K or whatever that level is at. But that is a lot less people than those concerned with people thinking they dont want to earn that extra dollar on a higher income tier because they think their whole income gets taxed that at the same higher rate.
I know quite a few moderates who should know better about tax rates and writing off expenses . I am putting out a similar diary here because I don';t think the Democratic Party has done a good job eradicating this ignorance and I know for a fact that his misleading propaganda from Romney types has cost Obama some upper middle class votes because I have talked to these people and have had heated arguments explaining simple business concepts . even when they understand what I say (how could they not, these are engineers, doctors), what I noticed is that their ignorance in the past has made such feelings so deeply ingrained that they don't reconcile their deep hatred for even a minor tax increase tothe reality that it will barely affect their income.
Here is an article in huffingtonpost which talks about even the NYT's business writers pandering to the same ignorance in their writeup of people forcing themselves to take vacations if they are on the borderline income of the highest tax tier. That article also has links to a good piece by Jason Linkins.
For whatever reason, an article titled "Investors Rush to Beat Threat of Higher Taxes" was published by The New York Times despite the fact that it contains a galling bit of stupidity, which could spread like a supervirus to the general public.There is awareness of this ignorance by some in the media. Let's hope something is done about it, but I am not raising my hopes up.
It is these three paragraphs in particular:
Kristina Collins, a chiropractor in McLean, Va., said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.
Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.
“If we’re really close and it’s near the end-year, maybe we’ll just close down for a while and go on vacation,” she said.
The New York Times' Public Editor Margaret Sullivan, notified of this over Twitter by Mother Jones' Nick Baumann, responded by saying, "You're not the first to complain. I'm going to let the business editor know that we've heard a lot about it." All well and good! Hopefully, she has by now checked out this story in her paper for herself. I encourage her to take up the task of publicly discomfiting the reporters who wrote the piece, as well as the editor who signed off on it, on the grounds that it would be good for public health.Democrats, get to work and educate the country because we may not be so lucky to have an idiot like Romney run in each election. I am also welcoming feedback that I could use to frame better arguments on all these issues when I meet with my friends who mean well but have an inexplicable blind spot when it comes to understanding taxes.
Dave Weigel, who gets the hat tip on this one, raises the obvious question:How do people still not understand that, and how does it color the debate over taxes? Barack Obama's managed to win two elections on a pledge to hike that top rate, and yet the people who don't understand it manage to get quoted every year.I think maybe Dave just answered his own question. This is the sort of innumeracy that spreads casually, in minor articles such as this piece in The Times, where this aggravating ignorance somehow manages to find its way into the copy. It spreads in pieces like this piffling little "review" of Laura Laing's Math for Grownups, in which USA Weekend attributed this tax ignorance to Laing, and prompted her to leave a comment correcting the matter. (That comment has since been removed, and USA Weekend never acknowledged their error.)
And when it spreads, people start making stupid decisions, like turning down raises, or not expanding a profitable business.
Reporters, when they come across someone in the wild who clearly does not understand how marginal tax rates work, are obligated to explain to such people that they are incorrect, and should never spread their ignorance to their readers -- unless, of course, you intend to point out that people, such as the aforementioned Ms. Collins, are laboring under misconceptions about how tax rates work
[UPDATE] One of the readers nextstep alerted me to a possible good point on investment income. Until recently, most of the public discourse has been on the relaxation of the tax cuts on regular income. I haven't had time to study it deeply yet.
Here is one link that complicates the discussion. It still does not affect the ignorance of basic concepts in other areas of tax law. For some reason, I have not heard much about this tax even from my conservative friends. I will update this diary once I read up on it. Here is a link for the rest of you to weigh in
http://online.wsj.com/...[END OF UDATE]
[UPDATE 2]: Ok , so if you are a single guy earning $200K net and $50,000 of it is investment income. Then you are offered another contract and you are supposed to earn another 100K. Let's say the highest income tax rate is back to being 4% higher(approximately). So now instead of earning 200K, you are earning $300K. You still have 50K in investment income. If I understand this correctly, if the tax rates are back to the Clinton era levels, and this investment tx is levied,you are paying an extra $400 plus $190 which is 590 on the extra 100K. So anywhere from 4 to 8% extra on each dollar above the highest tier cutoff is your extra tax.