Rich People Who Don't Understand Taxes Should Be Told So

By Derek Thompson

The fiscal cliff debate is stirring up all kinds of confused reactions today, ranging from to the merely misguided ("deficits first, jobs later") to the purely delusional ("austerity will fix everything!"). Somewhere in the middle are the "Very Important Businesspeople" who are threatening to stop working in the face of a tax hike of, like, $50.

Meet Kristina Collins (link via Kevin Roose) ....

... a chiropractor in McLean, Va*., [who] 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.

When President Obama says he's going to raise the top marginal tax rate, the key words there are "top" and "marginal." According to the president's plan, every dollar under $250,000 of earned income will enjoy the same tax cut it has today. He's only pledged to raise taxes on income above that level by about 5%. So, if you make $251,000 next year, your tax bill wouldn't go up by $12,000. It would go up by $50. A steak dinner, not a small car.

Basically, Kristina Collins is making a miscalculation that's probably worth tens of thousands of dollars. No wonder she doesn't want to expand her company.

An economic journalist needn't play financial adviser for his sources. But the distinction between marginal and total rates is confusing and ought to be made clear to readers. If thousands of small business owners like Mrs. Collins are operating under the presumption that Obama wants to raise taxes on every dollar of income for rich households, some might choose to keep from expanding their businesses. That's not just bad for their hypothetical new employees. It's bad for them! If not understanding the tax code is preventing you from working, that right there is ignorance making you poor.

The generous interpretation to my neighbor Mrs. Collins and her husband is that they do understand marginal rates, and have simply decided that they don't value income taxed at 40% above $250,000 as much as they value vacation time. That's fine, vacations are great, and money only buys so much happiness, and so on. But something tells me she -- like many other VIBs -- doesn't understand marginal rates, and her ignorance, passed along by the New York Times as dispassionate reporting, stands to make thousands of people poorer if they, too, don't full appreciate the meaning of the term marginal.

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*I don't know Kristina Collins, but I grew up in McLean, Va., which is a medium-sized D.C. suburb, and I'll be back there for Thanksgiving, so maybe if I catch her at that Starbucks off Chain Bridge Road, I'll let her know about the marginal rates.

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This article available online at:

http://www.theatlantic.com/business/archive/2012/11/rich-people-who-dont-understand-taxes-should-be-told-so/265464/