
There really are people planning to reduce their income to get below Obama's $250k bracket - tptacek
http://blogs.tnr.com/tnr/blogs/the_plank/archive/2009/03/03/wealthy-idiots-meet-idiot-reporter.aspx
======
gojomo
This behavior is not classically rational, but as experiments like 'The
Ultimatum Game' [1] show, people aren't rational in such matters. They will
accept less for themselves if they feel they're being treated unfairly.

Some people feel progressive taxation is unfair. Even if you think it's fair,
you might have objections to tinkering with the level of progressivity to buy
votes, or in times of crisis, or in times when the politically-favored (be
they defaulting homeowners, too-big-to-fail banks, or those running agencies
and projects fortified by stimulus spending) are drawing extra billions
(trillions?) from public funds.

So while these >$250K earners are not being hyperrational after-tax income
maximizers -- and hardly anyone is -- they are behaving in a very typical
human way.

[1] <http://en.wikipedia.org/wiki/Ultimatum_game>

~~~
tptacek
That's plausible and interesting, but it's not what the story says. The story
says these people believe that if they gross less than $250k, they will
somehow net more money than if they grossed more than $250k.

~~~
gojomo
I could not find any quotes in the ABC story that unambiguously indicate the
taxpayers think they would net more after-tax money with a lower income. The
closest is the initial Louisiana attorney, but even there it's clear the main
motivation is resentment -- and the "give it all away" comment is hyperbole.

Meanwhile, the tax accountant quoted on page 2 allows that it's _possible_ a
discontinuity with regard to deductions could create a situation where you
would net more by reducing your income. The tax code is gigantic and buggy;
it's not out of the question that a few taxpayers, in certain narrow
situations, sometimes face marginal rates over 100%.

In any case, my point is not with an overly-literal interpretation of the ABC
story. It's that this parade of commentators throwing around words like
'idiot' -- starting with Chait at the TNR piece and continuing here -- are the
real know-nothings.

This taxpayer behavior is not idiotic; it's evolved human behavior, in the
presence of perceived unfairness, that may serve long-term survival
strategies.

~~~
CWuestefeld
I just did my taxes Saturday night, so here is real experience, not theory. My
household income is near the point of this discontinuity.

Last year, my wife and I made $X more than the previous year. The end result
on our taxes was that we paid about (0.75)X more in taxes. This was due
primarily (as the account explained to us) to a combination of increasing hit
due to AMT as well as declining mortgage interest deduction as we approach the
end of our mortgage.

With an apparent marginal tax rate of 75%, what's the point of working harder?
And, in fact, if I can stand to lose, say $1,000 in income in order to buy
myself $4,000 worth of "life", that seems like a good investment.

~~~
jayp
Please don't find it insulting when I say I find your numbers hard to believe.
A claim of a marginal tax rate of 75% without any solid numbers is hardly
doing justice your thesis. If you'd give a more detailed breakdown, your case
would not seem so dubious.

~~~
anamax
> A claim of a marginal tax rate of 75% without any solid numbers is hardly
> doing justice your thesis.

The top marginal rate is around 40%. SSI is around 15%. CA's top is around
10%. Add in some deduction phaseouts and it's easy to see 70%.

~~~
jayp
Top marginal rate is 35% now.

The SSI stops after 105k (or so), so it is immaterial, because the marginal
fed tax rate is 28% at that point.

True that state income tax is a big one, for some states. So I completely
didn't bundle that in my estimate.

Phaseout deductions never _increase_ marginal tax rates, so also immaterial.

Nevertheless, exceeding 50% marginal tax rate with today's tax rates is
unlikely.

~~~
anamax
> Top marginal rate is 35% now.

There's a surtax that puts it at 39+.

> The SSI stops after 105k (or so),

Today.

> Phaseout deductions never _increase_ marginal tax rates, so also immaterial.

Phaseouts affect the amount of income taxed and thus affect the amount of
taxes due for a given increase in income. Suppose that earning $1k more costs
me $300 in deductions due to phaseouts. The result is that my AGI has gone up
by $1.3k. Assuming no bracket change, the taxes owed because of that $1k
increase is 1.3x the bracket rate.

Let's put some numbers on it. Suppose that the tax rate for that bracket is
10%. That's $100 for the $1k and $30 for the $300 for a total of $130 owed. Do
you really want to argue that the marginal rate for that $1k is not 13%?

I also left out sales taxes. Their effect depends on what the mix of goods
purchased (at least some food is tax free in most jurisdictions while gas,
tobacco, and booze isn't) and the average tax rate up to that point.

For a state like CA, with sales taxes typically over 8% and soon to be 9%,
that can add another 3-5% to the marginal tax burden.

~~~
CWuestefeld
Don't forget the AMT. It's the granddaddy of all phaseouts.

------
rm999
I'm surprised no one has picked up on this yet: families who make $249,999 may
actually pay far fewer taxes than families making $250,000. Why? Capital gains
taxes, which Bush set to 15%. Obama will increase this tax to 20% for families
making >= $250,000
([http://www.google.com/hostednews/ap/article/ALeqM5jd7Vs2tjPA...](http://www.google.com/hostednews/ap/article/ALeqM5jd7Vs2tjPAplFaABT9kaFRR9a56wD96JIAI03)).
Also, all sorts of other possible deductions would be removed.

Wealthy families often make much of their money from investing, so a 5%
capital gains tax increase can be pretty significant.

~~~
gnaritas
> families who make $249,999 may actually pay far fewer taxes than families
> making $250,000.

That's not how tax brackets work. Jumping into the higher bracket doesn't mean
you make less money, it means you pay more taxes for the amount above the
bracket, but you'll pay the same tax rate on the 249k as the guy only making
249k. So he'd only pay the 20% rate on the extra dollar, hardly far more than
the other guys.

~~~
rm999
Notice that I'm talking about capital gains, not income. They are taxed
differently.

A family making 190,000 dollars a year in normal income and 50,000 dollars a
year in long-term capital gains will pay the normal taxes on 190,000 dollars
(as you describe it, with brackets and what-not), and 15% on the 50,000
dollars. A family making 200,000 dollars plus 50,000 in LTCG, however, will
break the 250,000 dollar barrier and will have to pay 20% on that 50,000. That
means the cost of that extra 10,000 dollars in income cost them 2,500 dollars
in additional taxes.

~~~
gnaritas
Hmm.. you're right, I didn't realize cap gains weren't bracketed like income.
Still, I have no sympathy, getting nailed for extra taxes because you make
more than a quarter million a year is a nice problem to have, I wish I had it.

~~~
xenophanes
it's stupid to have this huge jump in taxes when you make one more dollar. 5%
of the gains on your investments is a big difference.

~~~
gnaritas
Donate that dollar to charity and deduct it, you're below the cap, easy
enough; you're right though, it is stupid.

------
yan
If I had a nickel every time I had a conversation clearing up the US tax code
just a little bit, explaining that each bracket gets taxed individually, I'd
be making money in a very weird way.

~~~
bprater
So what is my tax rate if I go from $249,999 to $250,000?

How much money in real dollars do I lose when I earn a buck more to make it to
a quarter million?

~~~
abossy
The point is that the work incentives are diminished at your high income. The
value you are creating that is being compensated for at ~$250k hits a glass
ceiling. You aren't exactly losing money, there's just no point in working
more at your highly specialized profession.

The author of the original article doesn't quite understand this point.

A blog post by (right-wing) Harvard professor Greg Mankiw clearly explains
this: <http://gregmankiw.blogspot.com/2008/10/blog-post.html>

~~~
cedsav
The higher your income, the lower your work incentive should be anyway
(regardless of tax situation). You can afford to slow down and enjoy life.

I don't believe that people change their work habit, or choose to work less,
just because of a relative tax increase. However, they may be more inclined to
find more tax efficient schemes.

~~~
anamax
> You can afford to slow down and enjoy life.

You're thinking of it from the wrong side.

You want these people to work hard and long because they're good at what they
do.

You benefit from their work. You don't benefit as much from their vacation.

~~~
jrockway
Yeah, I'm sure glad these people were buying subprime mortgages instead of
taking a vacation.

~~~
anamax
Huh? Folks earning around $250k and thinking about cutting back are not the
folks who got subprime mortgages.

------
jess
OK, all you smart guys, we know what a marginal rate is. It is still the case
that any entrepreneur will have less incentive to earn that 250,000th dollar
than she did to earn the 249,999th dollar. Maybe this isn't "rational", but it
is empirical: there do exist entrepreneurs who will decide not to earn that
250,000th dollar. Maybe that means they'll each sell one less widget, but it
also implies that some of them will lay somebody off. Business decisions are
not continuous, and they are extremely path-dependent. A small change in
circumstances (not 4 cents, but the analysis holds if someone decides to make
$270K rather than $310K) can lead to very divergent results.

Of course, our income tax system (not payroll or sales tax!) is already quite
progressive, so this was already the case. Also, if you believe in utility
functions, you can imagine that the 250,000th dollar is intrinsically less
alluring anyway. But Obama wants to make the system yet more progressive, so
no one will be surprised when these effects increase, with negative knock-ons
for jobs and growth. It isn't as though business owners have nothing better to
do with their time than provide jobs. Few of them will close up shop, but all
of them will reevaluate their workload. When they're not getting paid enough
for their work, they'll do less of it. Actually, I think most of us plebes are
basically the same.

~~~
anewaccountname
>Maybe this isn't "rational", but it is empirical

Actually it is perfectly rational; it just doesn't have as much to do with
with a progressive tax as you might think:
<http://en.wikipedia.org/wiki/Marginal_utility>

------
biohacker42
This article is 100% politics.

I'm not saying it's a bad or good article, I'm just saying it's politics, this
is HN, and I've flagged it.

------
micks56
1\. What if there are tax credits for those earning less than $250k, while
those credits are non-existent if you earn over $250k?

2\. What if these people are trying to defer income to a later date when the
income tax isn't as high?

3\. Or the people can invest capital in their businesses now, get below the
income tax increase by taking deductions, wait for the rate to decrease and
then cash in on higher profits due to lower taxes and gains from investment in
the business.

The dentist doesn't seem like an idiot to me. Maybe she never took much of a
vacation before. Now she will. Then when tax rates decrease the incentive to
work increases and she will increase her hours.

------
gcheong
I remember once a manager telling a fellow employee that a raise isn't
necessarily a good thing as the employee would end up paying more in taxes.

~~~
randallsquared
This is a common thing to hear at entry-level hourly jobs.

------
Macavity
From the original article:

>Schatsky said that the incentive to get under $250,000 may be more so if the
tax plan outlines that an individual who goes over a prescribed limit would
face a reduced value of their itemized deductions.

>"If the value of all your itemized deductions goes from a 33 percent level to
a 28 percent level than there would be a reason for people to do dramatic
things to reduce their incomes," said Schatsky.

This is coming from "Gary Schatsky, a financial adviser and the president of
N.Y.-based Objectiveadvice.com". As such, he presumably has a clue about
taxation matters, so I hesitate to call him out on this, but... surely no
government would ever enact such a scheme; they would bracket the deductions
in a similar way to the income, rather than having a magic barrier of $250k,
in order to avoid a situation where people have an incentive to earn less. To
me this seems common sense, but at the same time, I'm not a financial adviser
-- does anyone have any input on this?

~~~
ams6110
> surely no government would ever enact such a scheme

Heh. I would not put ANYTHING into the "surely they wouldn't" category when it
comes to government....

~~~
davidw
Government? Try humans in general. Get a large enough sample, and there will
be a portion of idiots. Sometimes they're even in charge, be it in a company
or a government. Or they might not be in charge, but their actions will
negatively affect other people in any case.

------
rsheridan6
The subjects of this article never said anything that implies that they don't
know what a marginal tax rate is. It profiles a lawyer and a dentist, two
professionals whose pay is in proportion to the hours they put in, who have to
decide when the marginal value of more money is less than the marginal value
of more free time. Naturally, there will be a cluster of people who decide
that the tax bracket change point is the right place to do this - more so the
larger the difference between the two brackets.

Or, to use the tone that the author used, this idiot author is so stupid that
he doesn't understand the concept of marginal utility...

------
psadauskas
I live in Boulder, and I'm looking for a new dentist. I know which one I won't
be checking out.

~~~
aaronblohowiak
How is understanding of the tax code is a transferrable skill to dentistry?

~~~
sangaya
I'd reckon it has to do with the person's ability to analyze the facts of a
situation and apply it to decision making. I wouldn't want a dentist to look
at my teeth and incorrectly decide that a root canal should be performed when
a more accurate analysis of the facts would suggest a simple filling.

In the Tax Code case the person should be intelligent enough to know that they
don't understand the tax code rather than pretend they do and continue to make
poor decisions because of it. This personality trait may lead them to fail to
acknowledge a lack of understanding when it comes to a certain dental
procedure, but rather than educate themselves, they go ahead and make an
incorrect decision.

I think the skill of general intelligence does indeed transfer from tax code
to dentistry.

~~~
aaronblohowiak
If you can create a model of "general intelligence" that is a consistent
predictor of cross-domain success (and not simply an aggregate or derivative
measure, like "g" <http://en.wikipedia.org/wiki/General_intelligence_factor>
), then you could really make a name for yourself, not only in psychology but
also in artificial intelligence.

It seems that the crux of your argument is "the dentist should have known that
she did not know the tax code well, and was unqualified to make the decision."
One of the most common failings of the human mind is to over estimate the
skill level of the self ( <http://en.wikipedia.org/wiki/Lake_Wobegon_effect> )

------
ckinnan
The tax code is an outrage. The sad thing is that we waste 22 cents in
compliance and complexity for every dollar raised for the treasury from the
income tax. Obama's plan makes the complex code even worse, increasing the
deadweight loss to our society.

<http://www.taxfoundation.org/news/show/1281.html>

------
steveplace
_The ABC article is based on the premise that an individual's entire income is
taxed at the same rate. If that were the case, it would be possible for a
family earning $249,999 to have a higher after-tax income than a family
earning $255,000, because the family earning $249,999 would pay a lower tax
rate.

But that isn't actually how income tax works.

In reality, a family earning $255,000 will pay the higher tax rate only on its
last $5,001 in income; the first $249,999 will continue to be taxed at the old
rate. So intentionally lowering your income from $255,000 to $249,999 is
counter-productive; it will result in a lower after-tax income._

From here: <http://mediamatters.org/countyfair/200903030013>

------
Dilpil
This is not an argument for 'simplifying' the tax code, if anything, it should
be complicated. Using a discrete cutoff point, while easier to explain to
voters, is far more gameable than using say, a logarithmic scale.

------
patrickg-zill
If you make more than $250K and donate a lot to charity, you could be hit
pretty hard - you can only take a deduction equal to a tax bracket of 28%
rather than the higher tax bracket you fall into.

------
tlrobinson
Fiscal Darwinism?

------
vaksel
Noone that stupid would have the brains to make $250K a year to begin with.

All of these people are bullshitters. Pretty much on any site you visit you
have someone claim that they are going to work less/close their business/shut
down just to avoid hitting that 250K mark. Ever notice how its always a brand
new member making such a post? The few times a long time member posted such
drivel, it took a few minutes to find out that the person was full of shit.

~~~
time_management
There are a lot of stupid people breaking $250k/year.

When you get out of school, you'll discover that the correlation between
intelligence and income is low. There are dumbasses who succeed in investment
banking on account of sheer stamina and frat-boy charisma. Also, real estate
is a "profession" in which idiots thrive, because they are closer to the
animalistic/territorial emotions involved in that game than smart people.

Finally, there are some people in prestigious careers (doctors, lawyers, and,
yes, even professors) who are not low-IQ people, but are still idiots... and
you'd be amazed how uninformed many of them are. Idiocy has a lot more to do
with provincial attitudes and willful ignorance than an IQ score.

------
tptacek
I don't have high hopes for this getting upmodded, but it sure is a funny
story.

~~~
icey
The past couple of weeks have really been a lesson in FUD. I have politically
active family members on both sides of the line, and its amazing to hear how
different every policy sounds from each of them.

~~~
anamax
> The past couple of weeks have really been a lesson in FUD. I have
> politically active family members on both sides of the line, and its amazing
> to hear how different every policy sounds from each of them.

The fact that different people see the same thing differently does not imply
FUD.

An elephant from its rider's perspective is very different from an elephant as
seen by an ant.

~~~
tptacek
If you see it from the perspective of, "for every dollar I make over $250k, I
have to give $2 to the liberals", the issue isn't one of perspective.

~~~
kenver
I thought it was a 4% increase on the marginal rate, which is currently 35%. I
was also under the impression that the top rate only applied to salary over
349k, not 250k. So if you're on less than that there will be no change, and
over that you will be paying 4 cents more per dollar, which desn't sound that
bad to me, but then again I won't be paying it!

~~~
anamax
4% on 35% is 10% more taxes.

Yes, that's marginal, but you're forgetting the phase-outs for various
deductions and credits. They can push the marginal rates up quite a bit.

Most of the ones that I know about are at less than $250k.

------
earl
Wow, both a journalist and lawyer were too stupid to figure out how the tax
code works? This really isn't rocket science.

Every time journalists and newspapers whine and carry on about going out of
business... they need this quoted to them. The problem with taking advice from
stupid people is you can't use it -- you have to check everything yourself
instead of trusting the information. Which essentially renders any newspaper
written by reporters like this utterly useless.

~~~
tptacek
I like the "new media" angle here --- a professional ABC newsroom ran this
batshit crazy story, and the blogomosphere caught and corrected it. Death of
the republic predicted, film at 11.

