Tax the Rich: Does $250,000 Make You Rich?

Posted October 9, 2010 in Uncategorized by Arthur Buono

After the midterm elections, Congress plans to vote on the expiring Bush tax cuts. A lot’s been made about whether raising taxes by letting the cuts expire is a bad idea in the current economy. The debate also touches the graduated tax and at what income level should a higher tax be imposed.

     
  • Bush tax cuts set to expire, political battle ensues
  • Obama plan would let cuts expire at $200,000, $250,000, for singles, couples
  • Graduated tax means expiration affects only income above those amounts

 

Tax Debate Highlights Political, Class Differences

It seems the income tax has few friends. But since the modern income tax was introduced in 1913 (by Constitutional Amendment, which makes you wonder) we’ve always had a graduated tax. A graduated tax works by taxing income in increments. For example, the first $50,000 of income might be taxed at 15 percent, the next $100,000 at 28 percent, and so on. Although people with higher incomes pay more taxes than people with lower incomes, each income increment, or bracket, is taxed the same for richer and poorer alike.

As it stands today the top tax rate the highest earners must pay is far below the top rates from most of the past 80 years. The top rate has been as high as 94 percent. Rates on average are lower as well. This will remain true even if the Bush tax cuts expire altogether.

The question politicians are asking is where the line for the top tax bracket should be drawn. President Obama wants the tax cuts to expire for couples earning over $250,000. Some politicians, of both parties, say it’s not fair to tax couples making $250,001 at the same rate as couples earning, say, $2 million (or more). But as we know it’s just the $1 that gets taxed the same as the $1.75 million of the higher earner. If someone’s making $350,000, then the higher tax hits the extra $100,000. Nothing’s happened to the first $250,000. When you look at it that way, it seems maybe too much is being made of too little. If it still seems unfair, the answer is more tax brackets above $250,000.

But that’s politics. You may be wondering why are the Bush tax cuts expiring anyway? The answer to that is, you guessed it, politics. Politics and accounting. To make the cuts fiscally prudent, they had to sunset in ten years, according to a Senate rule. This would reduce the projected budget deficit beyond then. To go back on this now is just like having your cake and eating it too.

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