The other day I came to realize that the 10 million dollar threshold on the 70% marginal tax rate can be very simply messaged by converting it to a dollars per hour number.
Assuming a standard 40 hour work week and 52 weeks in a year and 2 weeks off each year, thats 2000 hours a year.
So, 10 million dollars/2000 hours = 5,000 dollar/hour.
[[ I am not a tax preparer, IRS employee, financial accountant, tax lawyer, tax law writer, etc. I’m just an ordinary person who thinks things.]]
I wrote a diary last week announcing this amazing (to me) revelation.
I was surprised at the less than full-throated support I got with this revelation.
That made me think a bit more about why everybody didn’t agree with my perspective. Here is my answer…
Every time I read anybody’s analysis of a tax rate change, it always ‘smells’ the same to me:
Suppose you make XX dollars, have YY deductions, ZZ exemptions, etc…
than your marginal tax rate is ##.
And your effective tax rate is (**) — which is lower than ## because thats how marginal tax rate structures work.
This sort of discussion and messaging leaves a bad taste in my mouth for two reasons.
1) It makes the whole thing sound complicated.
It _is_ complicated, I know that. But this sort of discussion makes it sound like it absolutely cannot productively be discussed simply and I don’t think that’s true.
2) This sort of discussion focuses on a persons current marginal tax bracket.
Either the focus is on how they are not really paying the marginal rate on all their income (a true statement), OR the focus is on how their effective tax rate is much lower than their marginal tax rate (a true and related statement).
*However* I believe a crucial aspect of the tax rate discussion is left behind.
Let me try to frame this as if Mr. Franklin is trying to explain the current tax rate structure to Mr. Johnson and let me focus on how Mr. Johnson might respond to what Mr. Franklin is saying.
Mr. Johnson currently pays some amount of tax. It’s complicated.
Maybe Mr. Johnson resents how much he pays.
Maybe Mr. Johnson thinks he is in a tax bracket that is unfairly high.
While Mr. Franklin drones on and on about how Mr. Johnson really pays an effective rate which is less than the marginal tax rate, Mr. Johnsons’ mind wanders.
Mr. Johnson knows that all this talk *does not change* how much tax Mr. Johnson actually pays.
Maybe Mr. Franklin stops talking long enough for Mr. Johnson to ask him about how whatever change in the tax structure Mr. Franklin is talking about would actually affect him.
We all know the answer to Mr. Johnsons’ question. If Mr. Johnson manages to increase his earnings by $1, that extra dollar will be taxed at Mr. Johnsons’ marginal tax rate.
All well and good. This leaves Mr. Johnson both resentful because he well and truly believes his current marginal tax rate is too high.
*But*, it also directs Mr. Johnson to resent raising rates on even higher brackets because — Mr. Johnson thinks, maybe one day he will reach those higher brackets.
And this is where I think we can improve the messaging on this 70% tax rate issue.
What Mr. Johnson needs to hear (imho) is that this 70% tax rate is no concern of his until his wages approaches $5,000/hour.
Maybe Mr. Franklin can remind Mr. Johnson that minimum wage is somewhere between $2/hour and $10/hour.
Maybe Mr. Franklin can remind Mr. Johnson that the median US wage is about $23/hour.
So, perhaps Mr. Johnson, who likely makes something like $23/hour is **NEVER** going to get anywhere near $5,000/hour and should not be personally afraid of this tax rate.
