The big lie?

It’s hard to go a day without reading some liberal pundit or reporter or politician claiming that President Obama merely wants to raise the top income tax rate back up to 39.6%, where it was during the highly prosperous 1990s.  This is false.  Under current law the rate is scheduled to rise to 43.4%, and the top capital gains rate (long term) will rise from 15% to 23.8%.

Why is this misinformation repeated over and over again?  Do the people saying this know they are lying?  If it was a conservative doing this I’m quite sure Paul Krugman would accuse him of intentionally lying.  I really don’t know what to make of it.  It’s depressing that they would almost universally think it’s OK to lie, but it’s also depressing if it’s because newspapers like the New York Times don’t even understand what’s going on.

Our incompetent representatives in Washington were not satisfied with creating two parallel tax systems, and then forcing taxpayers to compute their taxes both ways, and pay the larger amount.  So now they’ve added a third income tax system, a 3.8% tax rate on income over $125,000/year (oh yes, they lie about that too, calling it a $250,000/year threshold) on top of the 39.6% top rate.  In Sweden there is no marriage penalty, as everyone is treated with dignity, like an individual.  And the government merely sends you the bill.  A tax system of elegant simplicity.  Meanwhile the US sinks ever deeper into banana republic-style complexity.


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73 Responses to “The big lie?”

  1. Gravatar of Vladimir Putin Vladimir Putin
    23. November 2012 at 18:01

    …yet the sheep will believe anything..

  2. Gravatar of DJ DJ
    23. November 2012 at 18:15

    Not including SS&Medicare taxes as part of the income tax rate has been a pretty standard tactic for years (remember the 47%?). Generally it’s a republican technique, but obviously the dems aren’t above taking advantage of it as well if it suits their political goals.

    If this is your “lie” threshold I doubt you can find a news article that doesn’t get you angry. Maybe they all should…

  3. Gravatar of gwern gwern
    23. November 2012 at 18:47

    Isn’t the point of the scheduled tax increase/fiscal cliff to force the Republicans to negotiate for a more acceptable tax increase, Obama’s proposal?

  4. Gravatar of Jeffrey Yasskin Jeffrey Yasskin
    23. November 2012 at 18:52

    “President Obama merely wants to raise the top income tax rate back up to 39.6%” sounds perfectly compatible with current law scheduling a rise to 43.4%. It would just mean that Obama wants to change current law, which isn’t a surprise. Have you seen Obama saying he wants to keep current law anywhere?

    For that matter, where is 43.4% coming from? http://www.taxpolicycenter.org/taxtopics/2012-Election-Tax-Parameters-2013.cfm says current law with full expiration only drives the top rate up to 39.6%.

  5. Gravatar of ssumner ssumner
    23. November 2012 at 19:08

    DJ, There’s a difference between a wage tax and an income tax. I would never accuse someone of lying because they left out a payroll (i.e. wage) tax. The 3.8% tax I’m referring to is an income tax, not like the social security payroll tax.

    Maybe the left really is ignorant of what’s going on.

    Jeffrey, It does no good to simply repeat the same misinformation. The point of this post is that you can’t believe what you read. This stuff isn’t rocket science—go out and discover the truth.

  6. Gravatar of Jon Jon
    23. November 2012 at 19:24

    Yes, it is especially insidious that the 3.8% tax was named a medicare tax and has been treated as if it were payroll tax when it is nothing of the sort. There is no employer half, and it isn’t on payroll; it is on income.

  7. Gravatar of Jeffrey Yasskin Jeffrey Yasskin
    23. November 2012 at 19:46

    For all I know, your post could be misinformation. Cite things if you want me to believe you.

    Is http://online.wsj.com/article/SB10001424127887324712504578131652992433518.html what you’re referring to? That’s much closer to a capital gains tax than an income tax…

  8. Gravatar of Jon Jon
    23. November 2012 at 20:23

    Jeffrey,

    “For all I know, your post could be misinformation. Cite things if you want me to believe you.”

    No, the situation here is that you add your wage income to your investment income and get X. If X is over a threshold, you pay another 3.8% in tax on the portion over that threshold. This is just like all of the other tax calculations you do on your 1040 today… Now this tax does have a loophole. Lets call it the sports-star, actor, banker loophole. If your wage income is over $250K, you get a tax break.

    Scott is dead-on in his complaint.

  9. Gravatar of Mike Sax Mike Sax
    23. November 2012 at 21:01

    Is there any such thing as someone who is mistaken about something which is distinguished from someone who knows what they’re saying isn’t true?

    Am I lying if I say 2+2=5? It depends if I know that it’s really 4. If I don’t, I’m not lying I’m must wrong.

    If “someone doesn’t know they’re lying” they aren’t lying. I thin intentionality is basic to the action of lying.

    I say all this presuming you were right about this. As to the capital gains tax rate, when it goes up under top earners that will be back to the Clinton rate-it was Bush who dropped it to 15%.

    As to the current rate being 43.4% I notice that you often just say this without explaining how you got it but I think you have sometimes explained it as being due to ACA.

    It’s neither a lie or even factually wrong to say that the top marginal tax rate is 39.6%. If the ACA is a tax-I guess that’s what Roberts decided though the convservatives actually needed to show it wasn’t a tax to win as it turned out-it’s not an income tax and hits everyone the same amount.

    When we speak of the marginal rates it’s not wrong not to factor every other tax we pay at any level.

    If someone who makes $16,0000 a year pays a tax rate no one says this is wrong because they also pay a 7% state sales tax.

  10. Gravatar of Mike Sax Mike Sax
    23. November 2012 at 21:03

    If someone who makes $16,000 also pays a tax rate of 12% no one says that’s wrong to say as they also pay a 7% sales tax.

  11. Gravatar of Mike Sax Mike Sax
    23. November 2012 at 21:04

    How is the ACA tax an income tax?

  12. Gravatar of Jeffrey Yasskin Jeffrey Yasskin
    23. November 2012 at 21:06

    Jon, I think you’re disagreeing with the other paragraph in my comment, but whatever.

    Now, I’m far from an expert in tax law, but I see 3 top brackets here:
    Wage income: 39.6%
    Capital gains income: 23.8%
    Non-wage, non-capital gain income: 43.4%

    Do you know what fraction of marginal income above the $250K (per family) level falls in each category? I’d assumed that most income was long-term capital gains or wages, but for Mr. Sumner to have a point, there would need to be a significant chunk in that non-wage, non-capital-gain category.

    Or we could quit nitpicking and just agree that this is way too complicated, and why won’t voters accept less favorable tax treatment for some of the choices they’ve already made so that we can simplify the whole thing?

  13. Gravatar of Mike Sax Mike Sax
    23. November 2012 at 21:24

    As far as SS and Medicare are concerned, the rich pay a much lower percentage of their income towards this anyway as the cap is so low.

  14. Gravatar of Jon Jon
    23. November 2012 at 21:25

    Jeffrey,

    I don’t think your argument about capital gains helps the calculation. The reason is again you need to think about this as a pure marginal tax step with a loophole. Let’s look at it from the incentive to work perspective. I have my investment assets already so there is some stream of investment income for the year. Yes some of that is cap-gains, some is dividends, some is interest. Now I start to work and each day I work I earn some more money. What’s the tax-rate on the marginal decision to work more day? If my AGI exceeds 250K and my investment income > AGI-250K, its 43.4% on that extra day worked.

    We haven’t even discussed the semantics of the rest of the tax… which I avoided since Scott tried to set that aside. If we ignore social security which in theory does not go into the general fund, there is a 2.9% tax on wage income below $200K and 3.8% on wage income above (the latter part was passed with the ACA too). So you can also view this tax as converting what was once a payroll tax into an income tax and setting the top-rate at 43.4%.

    Either way the top-rate is scheduled to be 43.4% in 2013.

  15. Gravatar of Saturos Saturos
    23. November 2012 at 22:06

    Is Obama going ahead with that Buffett Rule thing or not? Wouldn’t that add a fourth layer of complexity? (Wasn’t the AMT already designed to satisfy such concerns?)

  16. Gravatar of Mike Sax Mike Sax
    23. November 2012 at 22:31

    If so Saturos it didn’t work. Or at least that’s the premise of the Buffett Rule. Buffett had said that he pays a lower effective tax rate than his secretary. This was the premise of it-so this would mean the AMT had no impact here.

  17. Gravatar of Jon Jon
    23. November 2012 at 22:47

    “Buffett had said that he pays a lower effective tax rate than his secretary.” which is another fib.

    Dividends and capital gains aren’t given preferential treatment in the tax code. Quite the contrary, the tax code penalizes them: they are taxed as investment income on top of being taxed as labor income and as corporate income.

    So Buffet figured his effective tax-rate wrong.

    The whole idea that dividends and capital gains are treated preferentially is a fib. Rather than being taxed twice as much or three times as much (if a dividend from a corporation), then are taxed 50% or 150% more than wage income.

  18. Gravatar of Saturos Saturos
    23. November 2012 at 22:50

    Jon, good luck convincing Mike of that…

  19. Gravatar of Jon Jon
    23. November 2012 at 23:03

    Mike Sax writes: “As far as SS and Medicare are concerned, the rich pay a much lower percentage of their income towards this anyway as the cap is so low.”

    The so called Medicare tax has no income-cap–so called because the funds go into the general fund unlike SS where there is actually a second set of books…

    Speaking of which, it is also a lie to say the rich ‘benefit’ from the SS cap. SS is a self-contained system. Your benefit is computed from what you pay in. The benefits are capped and so is the maximum contribution. As it is SS is quite progressive. Sure you could make it even more progressive, but lets be honest about that, not pretend that the rich are getting a beneficial deal right now. They are not.

  20. Gravatar of Mike Sax Mike Sax
    23. November 2012 at 23:09

    Yeah Saturos is right. No matter how many times I hear this argument I don’t get it.

    It may be becasue I’m slow. That’s one explanation. But I just don’t see the idea that becasue you bought stocks in a company that paid taxes, you can complain of being double taxed if you have to pay taxes on whatever gains you realize.

    I think that cutting capital gains taxes to zero would be the biggest bonanza for the rich in economic history regardless of what the company itself paid. I don’t see what a company pays in taxes on profits as in any way commensurate with what an invidiudal pays on stock or divident gains. You know I own GE stock and they paid taxes-though of course GE in particular is on record as not doing so-so I don’t have to pay any taxes as “I” already did.

    To me it just isn’t the same thing. Could I be convinced of that? I’ve never seen an argument that has done until now. But, hey, never say never right?

  21. Gravatar of Mike Sax Mike Sax
    23. November 2012 at 23:20

    See Jon you’re using the “honest” line as well. I have not said a single thing on this board that I don’t believe to be true. It’s possible that I could be wrong about any number of things but there’s no desire to decieve-least of all myself.

    Now I don’t see that SS is so prgoressive. The story of people like Ayn Rand shows that even for people that are quite comfortable off SS is a pretty good deal. The richer you are the lower percentage you have to pay and yet you receive the same benefits.

  22. Gravatar of Saturos Saturos
    23. November 2012 at 23:55

    Mike Sax. Suppose you use your paycheck to buy a car today. Suppose your friend uses his to buy a car which only gets delivered next year. (He gets a discount for waiting.)

    Should his “gain”, as the contract he holds appreciates from a piece of paper to a brand shiny new car, be taxed in addition to the tax that was paid when he first received his paycheck?

    There are things on the market available for everyone to spend their money on. (Of course those with more money can spend more, that’s the point.) Some of them deliver benefits today. Others deliver benefits later on. The later is called “saving” and we shouldn’t tax it, if we know what’s good for us.

    And that’s not even counting the corporate tax, that’s triple taxation…

  23. Gravatar of Saturos Saturos
    24. November 2012 at 00:00

    One of the first lessons of economics: focus on exactly those margins which you wish to focus on. If you mean to reduce relative affluence, then tax people for being relatively affluent. Don’t tax people for saving more, which is merely a symptom of relative affluence.

  24. Gravatar of Saturos Saturos
    24. November 2012 at 00:06

    Mike, I appreciate your honesty and well-meaningness, but unfortunately you suffer from irrationality (as we all do, in varying degrees).

    You make two arguments in defence of your views on SS that are blatantly illogical:

    “The story of people like Ayn Rand shows that even for people that are quite comfortable off SS is a pretty good deal. The richer you are the lower percentage you have to pay and yet you receive the same benefits.”

    The first sentence is a non-sequitur, it does nothing to refute the view that SS is progressive. The second is the fallacy of switching from percentages to absolute magnitudes.

  25. Gravatar of Saturos Saturos
    24. November 2012 at 00:07

    Mike, I guarantee your grandkids would be better off if the cap gains tax were cut to zero (ceteris paribus) no matter where they were in the income distribution.

  26. Gravatar of Saturos Saturos
    24. November 2012 at 00:08

    In fact, we should really call it the “consumption distribution”, and calculate it accordingly…

  27. Gravatar of JB JB
    24. November 2012 at 00:49

    Mike Sax: “It may be becasue I’m slow. That’s one explanation. But I just don’t see the idea that becasue you bought stocks in a company that paid taxes, you can complain of being double taxed if you have to pay taxes on whatever gains you realize.”

    Think about the firm as a joint venture of workers (who provide labor) and stockholders (who provide capital). The firm produces and sells its output, and pays suppliers. Whatever is left over, will be distributed in the form of wages (to workers) and profits (to stockholders). The way how this is distributed is determined by some wage bargaining between the workers and the stockholders.

    OK, now both the workers and the stockholders want to take the proceeds of their successful joint effort and enjoy it. Well, before they can do so, they have to tax it.

    The worker takes his share of the firm’s revenue (called wages) and pays income taxes on wage income, SS+Medicare, etc. It may be that “the firm pays part of that” but that’s really irrelevant. What matters is the total tax burden on labor income, whoever pays it. Reporting that the firm pays you 100k and you pay 4.2% social security is nonsense. In fact, the firm pays you (roughly) 106.2k and you pay (4.2%+6.2%) social security.

    Now the shareholder wants to do the same. But for him, it is more complicated, because he has to do this exercise twice. First, he must report his share of firm’s revenue (called profits) as corporate profits, and tax it. And then, as a second step, he must take these after-tax profits and tax them as dividend income. Thus double taxation.

    The conclusion is the following: When we think about tax burden imposed on labor and capital, we must take into account the whole process from firm’s revenue to the household pocket. This in particular means that, on wage income side, we have to account for the SS+Medicare taxes “paid by the firm” (really paid by the worker, just disguised as paid by the firm); and, on the capital income side, we have to account for both corporate income tax and dividend income tax.

  28. Gravatar of Michael Michael
    24. November 2012 at 05:43

    “I guarantee your grandkids would be better off if the cap gains tax were cut to zero (ceteris paribus) no matter where they were in the income distribution.”

    Disagree, if only because having different types of income taxed at diffferent ways drives people and businesses to engage in complex schemes that have no value beyond tax avoidance. There should be one tax rate that applies to all forms of income, so that there are no gains possible from tax avoidance behaviors. This has to include corporate income, wage income, dividend and capital gains income. The double taxation issue can be avoided by letting corporations write off every dollar that gets passed through to shareholders (and taxed at that point). Additionally, long term investments (whether or not they are equity investments) should be indexed somehow to avoid taxation of inflation “gains”. And finally, payroll taxes should be folded into the income tax system. Then you can have one single tax rate on all income above a particular threshold, say $50K. That would be enormously more progressive and equitable than the current system and would not reward actions that have no value beyond exploitation of tax loopholes.

  29. Gravatar of Mike Sax Mike Sax
    24. November 2012 at 06:01

    “I appreciate your honesty and well-meaningness, but unfortunately you suffer from irrationality (as we all do, in varying degrees).”

    Saturos, while I don’t feel what I’m saying is irrational-for all I know maybe you’re right.

    I’ve never claimed to be anything other than an interested layman on monetary matters.

    Still I want to learn as much as I can about it.

  30. Gravatar of Saturos Saturos
    24. November 2012 at 06:50

    Michael, disagree. The ideal system would be more like this: http://www.themoneyillusion.com/?p=7091
    We should tax all forms of consumption equally. That means not taxing capital income, which is itself a form of consumption. And the economics profession agrees with me. “Income” (claims on resources) is irrelevant, what matters is the transfer of the consumption of resources. You can trade a claim for another claim, it doesn’t mean you’ve actually gotten richer. Romney got his wealth from being paid to organize businesses; his capital income is something he already bought and paid for.

    Now the carried-interest exemption, on the other hand, is another matter entirely…

    Mike, never stop learning! That’s the right mindset!

  31. Gravatar of dtoh dtoh
    24. November 2012 at 07:20

    Saturos,
    Agree with you. We need to replace production taxes with consumption taxes.

    The other thing people miss is that with taxes on capital, if you have asymmetric returns on new business formation (a few winners and a lot of losers), which we do in many high risk sectors, then even very low nominal tax rates on capital will result in negative expected after tax returns. This has a huge impact on capital formation and economic growth.

  32. Gravatar of Michael Michael
    24. November 2012 at 07:39

    Saturos,

    The problem I see is that people will come up with “creative” ways to recharacterize their wages as capital income to avoid taxes. For example, Mitt Romney’s “carried interest”. As long as different types of income are taxed differently, people who have the ability to work the system will do so.

    I also think it is absurd that most ordinary people will pay 3 different tax rates on their long term capital income: the LTCG rate, for non-tax sheltered income, 0%, for capital assets held in a Roth IRA, and the income rate for capital assets held in a 401K.

    In effect, 401K investors subsize Mitt Romey’s labor.

  33. Gravatar of Mike Sax Mike Sax
    24. November 2012 at 07:49

    What’s interesting is while most conservatives love Reagan’s “tax reform” deal with Tipper O’Neil, one thing it did was raise the capital gains tax rate to the same level as wages.

    What they like about it, is that it was as close to a flat tax as we’ve gotten-there were just two rates at 28% and 15%.

    To my mind that’s extremely regressive but the’ve never gotten so close to the flat tax ideal since.

  34. Gravatar of Steve Steve
    24. November 2012 at 08:11

    dtoh: “then even very low nominal tax rates on capital will result in negative expected after tax returns”

    I agree. This applies even in the public equity markets. If I expect to make $250K once every three years in my investment accounts, I will pay Obamacare taxes. If I can figure out how to smooth my gains down to $80K every single year, I am better off. Thus capital flows to lower risk segments of the market, favoring bonds over equities, large companies over small companies, and staples over cyclicals.

  35. Gravatar of Steve Steve
    24. November 2012 at 08:43

    Michael: “and the income rate for capital assets held in a 401K. ”

    This isn’t technically correct. The tax rate you pay on the capital income in a 401K is the DIFFERENCE between the income rate at the time of withdrawal from the 401K and the income rate at the time of contribution.

  36. Gravatar of Jon Jon
    24. November 2012 at 08:58

    Michael writes:

    The problem I see is that people will come up with “creative” ways to recharacterize their wages as capital income to avoid taxes. For example, Mitt Romney’s “carried interest”. As long as different types of income are taxed differently, people who have the ability to work the system will do so.

    I agree about this issue but not because both are income. If people can be remunerated tax free they will attempt it… I’ve tried to think some about how to resolve this.

    I think the answer is something like a IRA/401K
    - Except, you can make a distribution any time (its just savings vehicle)
    - Anything you put in you take as a deduction against your current taxes
    - Anything you take out appears as wage income

    BUT, the practical issues of design a tax system and the moral framing of what’s happening are two distinct issues.

  37. Gravatar of Jon Jon
    24. November 2012 at 09:04

    Mike Sax writes:

    The story of people like Ayn Rand shows that even for people that are quite comfortable off SS is a pretty good deal. The richer you are the lower percentage you have to pay and yet you receive the same benefits.

    You don’t get the same benefits. See figure 1 and figure 3 of this http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/77xx/doc7705/12-15-progressivity-ss.pdf

    As you can see, the bottom 20%, get about twice out in benefits as they pay in. The top 20% get about half as much in benefits as they pay in.

    P.S. no commenters on this blog have been lying. We’re discussing about lies society tells itself.

  38. Gravatar of ssumner ssumner
    24. November 2012 at 09:24

    Mike Sax, You don’t seem to read very carefully, as you are just repeating what I said–it could be lying or it could be ignorance.

    As far as this:

    “It’s neither a lie or even factually wrong to say that the top marginal tax rate is 39.6%. If the ACA is a tax-I guess that’s what Roberts decided though the convservatives actually needed to show it wasn’t a tax to win as it turned out-it’s not an income tax and hits everyone the same amount.”

    I don’t have time to explain all this. Maybe some other commenters will fill you in. Jon seems pretty knowledgable. The Supreme Court was talking about an entirely different issue.

    Jeffrey, You said;

    “Now, I’m far from an expert in tax law, but I see 3 top brackets here:
    Wage income: 39.6%
    Capital gains income: 23.8%
    Non-wage, non-capital gain income: 43.4%”

    Nope, the wage tax will be 43.4%.

  39. Gravatar of Steve Steve
    24. November 2012 at 09:57

    The ACA mandated a 3.8% tax on capital income on the portion of AGI above $250K.

    Effectively what this means is if you have $x of capital income, your effective MTR on wage income is incremented by 3.8% on the portion of wage income falling between $250K-x and $250K.

    Above $250K in wage income, your effective wage MTR falls back down to the statutory rate (plus adjustments for phase-outs and the like), so Scott is only partially correct — if you have a huge salary, the ACA capital income tax doesn’t affect you that much, but it IS a big increase on wage incomes BELOW $250K.

  40. Gravatar of Steve Steve
    24. November 2012 at 10:00

    My last point needs to be repeated for emphasis: THE ACA INCREASED THE EFFECTIVE MTR ON WAGE INCOME BELOW $250,000, BUT NOT ON HIGHER INCOMES.

  41. Gravatar of Bob Murphy Bob Murphy
    24. November 2012 at 10:09

    Scott (or anyone else who agrees with what he’s saying), I just googled three different articles on this, and even tax accountants are telling me it’s a Medicare tax on investment income. So does that mean if I just earn a straight salary of $400,000, that my top income tax rate is 39.6%? If so, I don’t think anybody is lying, and you are the one who’s being a little misleading.

    (But if I’m wrong, then you are being perfectly accurate.)

  42. Gravatar of Jon Jon
    24. November 2012 at 10:29

    Bob, no if you go that route, the ACA has a provision for wage income too. The top wage rate is 43.4%–strictly speaking the ACA added 0.9% to the existing payroll tax.

    The net of this with the investment provision is that the payroll tax was converted into a general income tax for earners above 200k and the top rate is 43.4%.

    If you want to play semantic games with the traditional payroll tax portion of that, I go back to my first argument: there is a loophole in the law for people with very high wage income and no investment income, the sports star, actor, banker loophole. At best that’s a weird corner case.

    This blog thread shows the power of conformist pressures in society. Wow. Just wow.

  43. Gravatar of Steve Steve
    24. November 2012 at 10:30

    Bob Murphy,

    Read my prior comments. It’s a tax on investment income, but it’s based on AGI which means it raises effective wage taxes on incomes BELOW $250,000.

  44. Gravatar of Steve Steve
    24. November 2012 at 10:38

    I guess I need to brush up on my tax reading too. Forgot about the 0.9% “medicare” increase on wage incomes above $250k. I’ve been more worried about the interaction effects, where you have wage and investment incomes each below $250K, but combined the effective MTR is much much higher than before. Scott should probably clarify which tax rates he’s adding up to get his effective MTRs, as there are so many interaction effects it’s confusing otherwise.

    http://www.bbdcpa.com/articles/tax-provisions-in-new-patient-protection-and-affordable-care-act/

    Higher taxes on the affluent. To help offset the act’s cost, affluent taxpayers will face higher taxes. Beginning in 2013, taxpayers with more than $200,000 in earned income ($250,000 for families) will pay an additional 0.9% Medicare tax on the excess. In addition, those with an adjusted gross income (AGI) over $200,000 ($250,000 for joint filers) will pay a new, 3.8% Medicare tax on unearned income, such as interest, dividends, rents, royalties and certain capital gains. The tax doesn’t apply to retirement plan distributions.

    Also starting in 2013, the act raises the threshold for deducting unreimbursed medical expenses from 7.5% to 10% of AGI and limits contributions to flexible spending accounts for medical expenses.

  45. Gravatar of Peter N Peter N
    24. November 2012 at 10:41

    If you want to improve incentives, the way to do it is to make dividends deductible from corporate income tax and make interest payments not deductible (except for lenders like loan companies).

    It would sink the private equity thieves, which alone would be worth it. Imagine private equity that actually involved investing. What a concept. And maybe a bankruptcy claw back to recoup government pension benefit guarantee expenditures?

    Down with perverse incentives.

  46. Gravatar of Justin Justin
    24. November 2012 at 10:54

    Scott- If you don’t mind a suggestion for future blog posts, it seems a bunch of us would be interested in knowing exactly where 43.4% comes from. (And I’m not too lazy to calculate this, I just don’t understand taxes well enough to know how)

  47. Gravatar of Steve Steve
    24. November 2012 at 11:01

    income tax rate 39.6%
    medicare tax 1.45% (employee portion)
    medicare tax 1.45% (employer portion)
    medicare tax 0.90% (ACA portion)
    ——————
    total 43.4%

  48. Gravatar of Steve Steve
    24. November 2012 at 11:06

    Of course if you play that game, consider someone with $151K in investment income and $100K in salary.

    income tax rate 28%
    social tax 6.20% (employee portion)
    social tax 6.20% (employer portion)
    medicare tax 1.45% (employee portion)
    medicare tax 1.45% (employer portion)
    medicare tax 3.80% (ACA portion, wage/investment interaction)
    ——————-
    total 47.1% (on $100K wages)

  49. Gravatar of Steve Steve
    24. November 2012 at 11:10

    It gets even worse if you are in the AMT phaseout.

    Consider someone with $151K in investment income and $100K in salary.

    income tax rate 35% (if in AMT exemption phasout range)
    social tax 6.20% (employee portion)
    social tax 6.20% (employer portion)
    medicare tax 1.45% (employee portion)
    medicare tax 1.45% (employer portion)
    medicare tax 3.80% (ACA portion, wage/investment interaction)
    ——————-
    total 54.1% MTR (on $100K wages)

    Then add state taxes, and get a number in the 60s.

    Then add the ACA penalty, and the probability of means testing on social security and medicare…

  50. Gravatar of Jon Jon
    24. November 2012 at 11:37

    Steve, that’s a good point. The wage/investment interaction means the wage only and the investment only portions can combine to make the marginal tax on additional labor increase by the sum of the two–at least for the purposes of looking at disincentives to work a marginal hour/day. Good catch, I missed that one.

    It is still true though that for the purpose of computing taxes owed, the 43.4% rate is the one that goes into the calculation.

  51. Gravatar of Steve Steve
    24. November 2012 at 12:25

    I was originally confused because the medicare wage tax and the medicare investment tax are now both 3.8% (likely on purpose) so I wasn’t sure which one Scott was talking about.

    The key points are that the wage tax is obscured in 3 pieces (1.45% + 1.45% + 0.90%), and only the 0.9% part is new. The entire investment tax of 3.8% is brand new, and is written such that it can apply to people with low levels of wage income (and low levels of investment income) thereby introducing strong disincentive effects.

  52. Gravatar of Mike Sax Mike Sax
    24. November 2012 at 14:43

    Ok let me just show my ignorance. what investment tax do you mean-when was it passed? Was it part of ObamaCare?

  53. Gravatar of TravisAllison TravisAllison
    24. November 2012 at 16:12

    I am not sure that the 3.8% tax can be considered a pure income tax. If I am reading this Money article correctly, if you earned $400,000 in wage income and had $100,000 in dividend income, you’d pay an extra 3.8% on the $100,000. But every extra dollar of wage income would still be taxed at 39.6%.

    http://money.msn.com/health-and-life-insurance/know-the-facts-on-new-38percent-tax

  54. Gravatar of ssumner ssumner
    24. November 2012 at 17:21

    Everyone, If you disagree with me you are wrong–read Steve’s various comments for an explanation.

    The complexity comes from the fact that the 3.8% high end income tax is separated from the ordinary income tax, which will top out at 39.6%. Even worse, the 3.8% income tax rate is separated into two completely different systems. The part on wages is captured via the payroll tax, and the investment portion is captured through the income tax. Lots of smoke and mirrors to hide what’s going on from the public.

    Steve, Great example showing the actual top rate will be around 60%, not including the double taxation of corporate dividends. (although it’s a tad less, because the employer portion of the payroll tax is not income subject to the income tax.

  55. Gravatar of Bob Murphy Bob Murphy
    24. November 2012 at 19:03

    Scott et al., I’m not trying to be a jerk here, I mean this with sincerity. You have a blog post announcing that everyone in the media is lying. You give no citations, you just assert that the top “income tax rate” (your phrase) is not going up to 39.6%, but instead is going to 43.4%.

    Someone in the comments early on challenged you Scott, saying this was a Medicare tax. You came back, told the guy to go learn something (and provided no citations), and reiterated that no, this was an income tax, and you weren’t talking about payroll taxes.

    So I went and googled three different sources (I had to google because no one on Scott’s team had provided any links at this point in the discussion), and they all are telling me this is a Medicare tax on investment. (That sounds nutty to me, I grant you, and I can barely make sense of what the phrase even means.)

    So I come back, hat in hand, asking for some clarification, and Jon tells me this:

    If you want to play semantic games with the traditional payroll tax portion of that, I go back to my first argument: there is a loophole in the law for people with very high wage income and no investment income, the sports star, actor, banker loophole. At best that’s a weird corner case.

    This blog thread shows the power of conformist pressures in society. Wow. Just wow.

    No guys, if someone levies a tax on investment income via Medicare, you don’t get to call that an income tax with a loophole for all non-investment income, and then say anyone who denies that this is an income tax is a liar.

    My strategy for educating the public, Scott, would be to say, “This is confusing as hell, but here’s the actual situation with the coming tax hikes. As we’ll see, it’s a lot worse than just having marginal income tax rates go up to 39.6%. For the typical high-income earner, in fact, marginal income rates are jumping from X% to Y%. But don’t expect the press to repeat this, because the politicians deliberately made this confusing as hell. So here’s how it works:”

  56. Gravatar of ssumner ssumner
    24. November 2012 at 19:18

    Bob, Sorry if other commenters were rude to you, but you should be calling out the press, not me. If I claim Paris is the capitol of France do I have to provide documentary proof in my blog? Reporters could call any tax expert in the country and find out what’s going on, but they are too lazy. I explained it very clearly. The regular income tax is scheduled to rise to 39.6% next year. In addition the tax that was passed to finance Obamacare takes effect next year, it’s a 3.8% income tax on upper income people.

    There are commenters here who explain it in much more detail (like Steve) Read all of the details if you are interested. No offense, but I’m shocked that so many people are ill-informed on a major issue. Don’t people know that Congress enacted a big tax increase to pay for Obamacare? Did they think the tooth fairy was going to pay for it? If I said Obamacare requires people to buy health insurance would I have to prove it, or is that common knowledge? Then why do I have to prove that Congress passed a tax increase on the rich to pay for it? It should be common knowledge.

  57. Gravatar of Steve Steve
    24. November 2012 at 19:26

    Bob Murphy,

    I think Scott is arguing the current top tax rate is 37.9% (35.0 + 1.45 + 1.45).

    Obama wants to raise it to 43.4% (39.6 + 1.45 + 1.45 + 0.9)

    It’s NOT a 4.6% increase from 35.0% to 39.6%

    It’s a 5.5% increase from 37.9% to 43.4%

    That’s ending Bush + medicare employee/employer + ACA.

  58. Gravatar of Steve Steve
    24. November 2012 at 19:29

    The “lie” is two-fold: First, the level of the taxes is higher than what the media usually quotes. Second, Obama wants to raise income tax rates to 0.9% ABOVE CLINTON rates.

  59. Gravatar of Mike Sax Mike Sax
    24. November 2012 at 19:46

    So if it’s a “lie” to not count Medicare taxes as part of income taxes then this lie has been around a long time. Since Medicare was started in 1965 it’s never been considered part of income taxes.

    I appreciate this comment by Bob:

    “No guys, if someone levies a tax on investment income via Medicare, you don’t get to call that an income tax with a loophole for all non-investment income, and then say anyone who denies that this is an income tax is a liar.”

    As it shows that even a guy like him who knows a lot about econimics found this a confusing way to put this.

    Obviously this is not understood by many people as being as simple as the question of the capital of France.

  60. Gravatar of Steve Steve
    24. November 2012 at 19:52

    Mike Sax,

    Read my above comment. The ACA increased the tax rate on wage income by 0.9% and the tax rate on investment income by 3.8%. Even I was poorly informed about the wage tax increase, but most people are poorly informed about both. That means that “letting the Bush tax cuts expire” will raise rates to 0.9% and 3.8% above Clinton era tax rates, respectively, on wages and investments.

  61. Gravatar of Jon Jon
    24. November 2012 at 20:01

    Dear Bob, sorry you thought that was rude, but then I also thought your remark “(But if I’m wrong, then you are being perfectly accurate.)” was snarky. But hey, its the internet. Learn not to get bruised and sort through what is being said anyways.

    Please read the first paragraph of my response to you which takes your reply very seriously and gives you a serious answer.

    - There was already a 2.9% tax on wage income
    - The ACA added 0.9% on wage income for singles over 200K.
    - The ACA then added a 3.8% tax on non-wage income for singles over 200K.

    That makes in sum a 3.8% tax on income after the threshold is reached.

    As I said before, if you insist on treating the medicare wage tax separately, then I still argue that by rights this is income tax because people at that income level are going to have investment income.

    Second, I argue that if you have investment income the disincentive to earn wage income is still going to be 43.4% because your investment income is sunk. So you marginal decision is about how many hours/days to work. That wage/investment tax interaction qualifies it as an income tax. Albeit one that has some loopholes.

    Finally, the lie isn’t about whether the tax should be called an income tax; its about what the top-rate is. The top-rate excluding social security is most definitely scheduled to be 43.4%.

  62. Gravatar of Jon Jon
    24. November 2012 at 20:12

    Mike Sax writes: “So if it’s a “lie” to not count Medicare taxes as part of income taxes then this lie has been around a long time. Since Medicare was started in 1965 it’s never been considered part of income taxes.”

    As I’ve said, you don’t need to include the payroll (wage) taxes to make the case that the top-rate is 43.4% both because:

    1) Some households will see the 43.4% rate, just not all house-holds over the limit (if we ignore the medicare payroll tax aspect), and

    2) The effects on incentives to work are similar to experience a 43.4% marginal rate if your wage income is under 250K and your AGI is above.

    So as I just told Bob, there are three ways to tell this story. In each case the bottom line is that the top-rate is 43.4% therefore letting the bush cuts on the top-rates expire does not return us merely to the level under Clinton, it returns us to an even higher-level.

  63. Gravatar of ssumner ssumner
    25. November 2012 at 07:32

    Steve, No, the current top income tax rate is 35.0%. The current top wage tax rate is 37.9%. Obama wants to raise the top income tax rate from 35% to 43.4%.

  64. Gravatar of Major_Freedom Major_Freedom
    25. November 2012 at 14:21

    All legally mandatory payments to the state should be considered as taxes. If the taxes fall on ANY income earned (wages, profits, dividends, interest, capital gains, etc) then they should be considered taxes on income.

    If Medicare taxes on investment income go up, then that is an addition to income tax.

  65. Gravatar of Major_Freedom Major_Freedom
    25. November 2012 at 14:41

    The fiscal cliff fear mongering is all about raising taxes.

  66. Gravatar of acarraro acarraro
    26. November 2012 at 06:14

    But the 43.4% marginal rate is not the final rate. Surely that’s quite important.

    If you have more than 250k in wage income, and additional wage income will not be taxed at 43.4%, since the investment income is already completely included. So it’s more of a catch-up feature which is quite often higher than the final marginal rate.

    For example in the UK, we have the same feature proposed by republicans (with a linear implementation between £100k and £150k). I think it’s equivalent to 60% marginal tax, which then drops down to 45%. I never heard anybody arguing that the top rate is 60%.

    These temporary high marginal rates are even more common at the lower end of the income scale as well (sometimes close to 100%), so I am not sure I feel so bad for people earning between £100k and $150k.

    I agree you shouldn’t build a system with these features, but the standard definition of the top marginal rate is the tax on the final dollar of an infinite income (or at least I always assumed so).

  67. Gravatar of mijj mijj
    26. November 2012 at 10:21

    > “Under current law the rate is scheduled to rise to 43.4%”

    really?

    Not enough!

    For the top income reapers, it should be at least 80%. Useless parasites. And don’t give me that bollox about how the wealthy are the wealth creators. They’re not. The people who actually roll up their sleeves and do the work are the wealth creators.

  68. Gravatar of ssumner ssumner
    26. November 2012 at 17:47

    acarraro, Wage income will be taxed at 43.4% all the way up to infinity, even if you have no investment income. It’s equivalent to the 45% rate in the UK.

  69. Gravatar of Potpourri Potpourri
    26. November 2012 at 20:52

    [...] If any of you are bored, please go to this Scott Sumner post and figure out for me what the top marginal *income tax* (not including payroll tax) rate is, for [...]

  70. Gravatar of Keshav Srinivasan Keshav Srinivasan
    26. November 2012 at 22:29

    Scott, for the laymen here, could you please explain the distinction between wage taxes, income taxes, and payroll taxes? That might clarify a lot of the confusion.

  71. Gravatar of Potpourri – Unofficial Network Potpourri - Unofficial Network
    26. November 2012 at 23:21

    [...] If any of you are bored, please go to this Scott Sumner post and figure out for me what the top marginal *income tax* (not including payroll tax) rate is, for [...]

  72. Gravatar of acarraro acarraro
    27. November 2012 at 01:43

    So is that including the medicare+social security taxes (or is it just medicare taxes at that point)?

    Did the medicare taxes exist in the ’90? That seems quite relevant information.

    If they didn’t, you are completely right (and it sounds that the 0.9% surcharge falls under that category). If not, I am not sure that you can call the claim that you are going back to Clinton taxes a lie… I guess you still can considering the 0.9%, but again I don’t think that’s actually called an income tax (even if it is).

    I honestly don’t see how you can claim that the current top income rate is 35%, if you include the medicare tax in the post fiscal cliff scenario.

    Let’s say you have 250k wage and 100k dividends:
    If you get an extra 1$ in wage, you currently pay 35c income and 2.9c medicare.
    If you get an extra 1$ in dividends, you pay 15c in income tax.

    After the cliff, for an extra 1$ in wage you pay 39.6c income and 3.8c medicare.
    For an extra 1$ in dividends, you pay 23.8c in income.

    Is this right?

    I really don’t understand…

  73. Gravatar of ssumner ssumner
    27. November 2012 at 17:57

    Acarraro, The top wage tax is currently 37.9%, but the top income tax is currently 35%.

    The Social Security tax drops off at a little over $100,000, but the Medicare tax goes up to infinity.

    Keshav, A wage tax is a payroll tax. And income tax taxes both wages and investment income.

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