Looking out for the wealthy
The New York Times is always very interested in the travails of the wealthy, which may explain their interest in the “Debate Over the Definition of Rich” that is allegedly being kicked up as part of arguments over the fate of the Bush tax cuts. The discussion on that topic, according to David Kocieniewski, “has also veered into a more basic matter of fairness, whether a person who earns more than $200,000 a year should be taxed at rates similar to those who make $5 million.”
At his New Republic blog, Jonathan Chait points out that this story “seems to be based entirely on a misunderstanding about how the tax code works.” This is something we took pains to spell out in our most recent editorial:
In keeping with his campaign pledge, President Barack Obama wants to extend the Bush tax cuts only for annual income below $200,000 for individuals and $250,000 for households. For those who make more than this, he proposes to let the top two tax rates return to their pre-Bush levels: 35 and 39 percent—up from 33 and 35 percent. Historically, these higher rates are still quite low (in the 1950s and early ’60s, a period of sustained economic growth, the top marginal tax rate was more than 90 percent). Only the part of a taxpayer’s income above $200,000 would be taxed at the higher rates, and the president’s plan preserves some of the Bush tax cuts for capital gains and dividends. This means that the wealthiest Americans would still pay less in taxes than they did before the Bush tax cuts went into effect.
Chait breaks it down this way:
When you go from $250,000 to $250,001, you only pay a higher tax rate on that one extra dollar. Your taxes will go up by a few cents. If you earn $300,000, you will pay a slightly higher tax rate on the last $50,000 of your income — less than a couple thousand dollars.
Even people making half a million dollars a year won’t be “taxed at rates similar to those who make $5 million,” because only half their income will be taxes at the top rate.
One thing the New York Times is certainly right about:
The dispute over what income level qualifies as rich is caused, in part, by the tendency of people to gauge their own wealth by comparing themselves to those closest to them.
That explains why the Times often runs stories that read like self-parodies about the challenges of being wealthy in the city and its suburbs (keeping up with decorating trends; getting into private schools; finding a nanny who speaks Mandarin). They know their audience. But click to the second page of the article and you’ll read this useful corrective:
J. Bradford DeLong, an economics professor at the University of California, Berkeley, said many of the top earners in the United States did not consider themselves rich because they compared themselves to the statistically small segment of the people who earned more than them, rather than the much larger segment who made less.
“It is pathetic and embarrassing that somebody with five times the median household income, someone in the top 2 or 3 percent of the population, thinks of himself as just another ‘average Joe,’ ” said Professor DeLong, who was a deputy assistant secretary of the Treasury Department in the Clinton administration. “Why don’t you ask someone who makes $40,000 or $50,000 a year if they have a lot in common with a family making $250,000?”
Asking people if they think they’re “rich” enough to pay more taxes is a winning political strategy. Very few will say yes. (It’s like asking people if they consider themselves bigots.) But although it has populist cachet, “Who counts as ‘rich’?” isn’t the relevant question when pondering the future of tax cuts for the wealthy. “Who can afford to pay more?” is better. But the best question may be, “Who needs a break the least?”