Tuesday, October 28, 2008

Marginal Tax Sleight of Hand

Photo by Kyknoord

I have had it with the misleading rhetoric on comparisons of the McCain and Obama tax plans! Whatever your political persuasion, I hope most of us (about 99%) can agree that the "marginal tax rate" is just irrelevant, though this comparison continues to occupy center stage because it's an easy target.

A recent W$J piece (hat tip to Paul Caron at TaxProf Blog) compares . . . yet again . . . the McCain and Obama tax plans based on marginal rates; that is, the highest rate at which your LAST dollar of income will be taxed in our graduated (progressive) income tax system. One's first dollars of taxable income are taxed at 15% up to a limit, then 25% beyond that, then 28% beyong that, etc., until the highest "marginal rate" of tax on one's last dollar(s) is reached. Not suprisingly, the marginal income tax rate under McCain's plan is reported to be 35% (just as under current law, NOT rolling back the temporary Bush tax cuts from the former 39.6% rate), while the Obama plan's marginal rate is higher (the W$J suggests it's 41%, but this must represent a combination of the 39.6% reinstituted marginal rate plus losses of deductions and exemptions for high earners). So, the average person considering this issue might be concerned that an Obama administration would "spread the wealth around" by taking 5%-6% more tax from our last dollars--oh, my!

Here's the rub: how much do I have to earn, you ask, to break into the highest marginal tax "bracket"? The answer, in 2008, is $357,700 (either single or married filing jointly)! I don't know about you, but I'm FAR from having to worry about the highest marginal tax rate. I can't imagine that more than 1% of the U.S. population (even the U.S. taxpaying population) receives this much taxable income (remember--deductions, etc., allow particularly high earners with big deductible expenses to pay tax on only a fraction of their income).

Two observations follow from this. First, this talk of marginal rates is just silliness. Can we just agree that all of the extremely fortunate people who make (even combined-earnings couples) more than $350,000 of taxable income would prefer a McCain tax approach and leave it at that (though I see WAY more Obama signs in the yards of the rich suburb of River Forest, just north of where I live in Forest Park, outside Chicago)?! Marginal tax rates are utterly irrelevant for 99% of the population, and they show whom each candidate favors tax-wise: McCain favors high earners to offer incentives to produce jobs (trickle-down economics), while Obama favors middle-class earners and those who depend upon social programs (funded by wealth redistribution from the rich 1% to the not rich 99%). This is not news, it seems to me, and all the chatter about comparing tax plans is pointless. Far too much attention seems to be paid to the thin margin of "high-earner-not-rich-yet" (HENRY) people out there (and come on--if you make more than $300,000, you're wealthy in the mind of most Americans!!).

Second, the rate that matters is the effective rate; that is, the combined average rate applied to every dollar evenly. Effective rates vary greatly, too, but I would really like to see a more nuanced analysis of how the effective rate of the "average American" (or groups of them) would fare under McCain and Obama. I suspect effective rates would remain largely unchanged for all but the wealthy for McCain (that is, the Bush tax rollbacks would be made permanent, perhaps with a kicker cut for the wealthy), and effective rates for most people below the top tax bracket or two would go down under Obama (with tax shifted up to the higher earners).

I just can't imagine that the average U.S. voter really cares about this marginal tax rate issue--or at least, s/he wouldn't care if s/he realized how irrelevant the issue was for her/him. I would bet that the percentage of people who pay the marginal income tax rate is lower than the percent of U.S. voters who have lost a friend or relative in the war in Iraq, who are or know someone who has been victimized by immigration authorities or over-zealous federal prosecutors, or who are or know someone who has been wrongly convincted and is sitting on death row. The number and percent of people who pay marginal tax rates is clearly lower than the number and percent of voters who lack adequate health insurance and access to quality education. Aren't these issues far more important than marginal tax rates?

Update: Check out this cool CBO report on effective rates (its complexity suggests why we haven't seen more of this type of analysis).

Update 2 (10/29/08): Ask and ye shall receive! This CNNMoney story offers the sort of info I suggested would be more helpful . . . and it confirms my unsurprising speculation about how the candidates' tax plan effects would shake out (McCain blasting all taxes, with a big gift to the rich; Obama sticking it to the ultra-rich, favoring everyone else). For an even better discussion, see this paper by Citizens for Tax Justice.

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