Does ABC News understand how income tax works?
March 03, 2009 11:39 am ET by Jamison Foser
ABC News reports on "upper-income taxpayers" who are trying to reduce their income so they avoid proposed tax increases on those earning more than $250,000.
According to ABC, one attorney "plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law." According to the attorney: "We are going to try to figure out how to make our income $249,999.00." ABC also quotes a dentist who is trying to figure out how to reduce her income.
This is stunningly wrong.
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.
The people ABC quoted don't seem to understand that. Worse, ABC doesn't seem to understand it, either.
UPDATE: Another thing: the last third of the ABC article is devoted to the question -- posed in large, bold text -- "Does Obama Tax Plan Promote Class Warfare?" I addressed the media's absurd and one-sided use of the loaded term "class warfare" in my column last week.
UPDATE 2: ABC acknowledges flaws, re-writes article.
From ABC News:
President Barack Obama's tax proposal -- which promises to increase taxes for those families with incomes of $250,000 or more -- has some Americans brainstorming ways to decrease their pay, even if it's just by a dollar.
A 63-year-old attorney based in Lafayette, La., who asked not to be named, told ABCNews.com that she plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law.
So far, Obama's tax plan is being looked at skeptically by both Democrats and Republicans and therefore may not pass at all.
"We are going to try to figure out how to make our income $249,999.00," she said.
...
Dr. Sharon Poczatek, who runs her own dental practice in Boulder, Colo., said that she too is trying to figure out ways to get out of paying the taxes proposed in Obama's plan.
"I've put thought into how to get under $250,000," said Poczatek. "It would mean working fewer days which means having fewer employees, seeing fewer patients and taking time off."
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ABC News proves once again that public education in this country is in dire straits because their own reporters & news producers do not understand the issues that they are reporting on.
Great catch on this one, Jamison, thank you!
From the look of the comments on this Dr. rating website, Dr. Poczatek shouldn't have too much trouble reducing her earnings - http://www.ratemds.com/filecache/doctor-ratings.jsp?did=20753
Nice find.
It's worth pointing out that the 3 most recent ratings are from today. Considering that most of the other ratings are spaced out by months or years, I think it's safe to say that the 3 recent ones are fakes that are the result of this article.
Just trying to keep things honest. Obviously this woman is clueless, mean and probably a bad dentist, and there are plenty of undeniably genuine negative reviews on that page. However, honesty and justice should be important to us as liberals. Just sayin.
Of course, not like it matters. None of us will be going to her anytime soon anyway.
Great find.
Also,
"I've put thought into how to get under $250,000," said Poczatek. "It would mean working fewer days which means having fewer employees, seeing fewer patients and taking time off."
There's an easier way to do that. Either incorporate, or pay your employees more so your 1040 bottom line is less.
But this whole line of argument is disingenuous, because these people are not going to be doing any of these measures. They're liars.
You don't really have to "try" to reduce income these days. They should be talking about trying to reduce "taxable income", not actual income.
Aren't attorneys and dentists supposed to be the smart ones?
Don't answer that.
Yes.
As Atrios would say, this has been another edition of simple answers to simple questions.
I'm certainly no tax expert, nor am I familiar with typical details in tax code. But, the article in question (which I agree is terribly written and seems to be based on a false premise) does have the following statement from a tax expert:
". . .[T]he 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."
As the person quoted in the article pointed out, we do not yet know the details of Obama's plan. But, is it common for the federal income tax code to contains such provisions? Just wondering.
". . .[T]he 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."
The Obama tax plan limits the tax rate on deductions to 28% for incomes over $250,000 so there is NO INCENTIVE to keep your income under this amount. The proposal simply gives someone earning under $250,000 the same break on a $10,000 deduction as someone earning over $250,000.
http://www.nytimes.com/2009/02/28/your-money/28money.html?hp
Well, it could be joint income with a spouse, but whatever, she's lying, because all professionals are incorporated these days. Only a fool would be on an earned-income basis.
In other words. these people are phonies.
Jeez. I would love to make that kind of money.
LOL - you ignore the fact that many of the people who make that kind of money didn't just daydream like you about making that kind of money. They took out large student loans, studied hard to learn a trade, and spent many years without an income. You have - or had - the chance to do the same.
It seems like it is you who missed the point.
He was saying that he'd love to have the problem of having that much tax to pay.
For a resident of a high tax state such as CA or NY, the combined state ( up to 10.55% ) and proposed federal marginal tax rate (39.6%) the combined marginal tax rate is about half - with the tax increase representing about a 10% reduction in marginal after tax income. Note AMT prevents the deduction of CA tax from Federal Taxes).
Many high income tax payers will do things such as changing some or all their investment income to municipal bonds which pay no income taxes (but pay lower yields than fully taxable bonds of similar quality).
Others feel ripped off from the government taking half of what they make and work less as they feel the time off is more useful to them than the after tax income. Think of this as the equivalent of workers protest with a work slow-down.
Some will move from high tax states to low tax states or countries.
Others will see investing in their (or other people's) business (which might have meant hiring more people) becomes less attractive - as the return (only if successful) is reduced by 10% from the tax increases - and may simply decide not to expand - as the range of returns are not high enough for the risk.
For those who make the big bucks with ease - actors, singers, baseball players, mega investors - they not change what they do. But those who work hard and take major risks to their own wealth will frequently react as I outlined above.
If Warren Buffet's income barely gets his tax rate above 20%, as he says, the whiners have no real basis in reality. As it typical for their ilk.
I would like to point out that today's LA TIMES had two Letters to the Editor that were expressing the same flawed understanding.
http://www.latimes.com/news/opinion/letters/la-le-tuesday3-2009mar03,0,4276095.story
The ABC article clearly states: “Because we have a marginal tax system [...] what Obama's plan means is that the amount of tax you pay on each incremental dollar is higher only when your income is pushed into a higher tax bracket.”
Has it occurred to you that the reason the people interviewed don't want to earn more than 250K is to prevent their EXTRA earnings being taxed at the higher level?
Does ABC think that 98% of the population in the US will feel any sympathy for people making 250K+ regardless of what they pay in taxes? We are fortunate enough to be in a ver high income bracket and trust me, we live a very comfortable life even after taxes. On this salary it is very possible to save for retirement, save and pay for our children's college, give to charity, have a nice house in a good school district, have at least 2 cars, and take vacations.
No one in this income bracket does their own taxes and it's about taxable income not total income. A good accountant will tell you to sell loser stock to off set gains, buy some tax free bonds, max your 401K, start 529 accounts, and give to charity. Are people really this stupid? Of course I suppose people could live at or beyond their means on this high income but it really would be a rather lavish life style.
I made ends meet when we earned 24K when we were young and now I feel like the luckiest person in the world. I can't believe people complain about paying taxes at this income level.
The reduction to 25% is not exact since the Obama Tax Plan is not in any final form.
...Their deductions for mortgage interest, state and local taxes and charitable contributions would be reduced.
Unfortunately, ABC understands taxes better than Media Matters does. Yes, our tax system is a marginal system, as you described in the article, but President Obama's tax plan isn't to raise the marginal tax rate on people earning over $250K, it's to remove their itemized deductions. By wiping out their deductions, for mortgage interest for example, it become a very non-marginal tax increase. Earning one more dollar from $249,999 to $250,000 could increase your taxable income by tens of thousands of dollars.
For example, if a high wage earner had a mortgage interest deduction of $20K, and made $250K in income, their marginal taxes on that extra dollar of income would be $0.33, the current tax rate for that level of income, but their tax increase would be $6,600 because of the lost deduction for the mortgage interest. That extra dollar would have an effective tax rate of 6,600%, and that might just be enough to make someone think twice about going to work that day/week/month.
Sorry MM, you're completely wrong on this.
"For example, if a high wage earner had a mortgage interest deduction of $20K, and made $250K in income, their marginal taxes on that extra dollar of income would be $0.33, the current tax rate for that level of income, but their tax increase would be $6,600 because of the lost deduction for the mortgage interest."
Your example incorrectly assumes that Obama's tax plan would eliminate the tax deduction for mortgage interest for those with incomes over $250K. That is not the case. The proposal would simply limit the tax rate on the deduction to 28%, meaning that deduction would be $5,600 whether you earned $250K, $249K, or $100K.
The current tax code gives the wealthy taxpayer a bigger break on the same deduction than a middle class taxpayer. Why should the government essentially subsidize $6,600 of a weathy person's mortgage interest but only $5,500 of a middle class person's? That's backwards!
Again, here's a source:
http://www.nytimes.com/2009/02/28/your-money/28money.html?_r=1&hp
This question of 'Class Warfare' as a news story from ABC showed something else too, that the Lawyer and Dentist are planning on being "CHEATS" with their taxes come 2011. I hope the IRS is keeping an eye on these "tax dodgers".
As to dentists and lawyers and taxes, I don't ask my dentist for tax advice. I do ask him about oral hygiene. Likewise, I wouldn't ask a criminal lawyer about the tax code any more than I'd ask the Maytag repairman or Ayn Rand about political systems.
Sheesh.
I've never made anything like this amount of money. I don't have an advanced degree (yet, I'm in process). I'm not an economist, or a financial wiz, or even very good at filling out my checkbook or my own taxes.
But I know that you only get a tax increase on the amount above $250,000, not below it. My wife knew it too. My son, who's just now filling out his fifth IRS form, knows this too. They all reacted like I did... "Well, duh!!!"
And these people are lawyers and dentists? Did they go to a diploma mill or something? What level of boneheadedness and sheer selfishness would it take to actually want to DO LESS BUSINESS so you can avoid a 4.6% tax hike, even if it were on the whole amount? My mind boggles at the stupidity of people who are supposedly intelligent and educated!!!
You and your family are so right, especially with degrees from diploma mills - I just loved it, 'Smile'.
Everyone knows that the more money you make the best accountant you go to, duh? But to go on tv shamefully telling about how you will think of ways to "CHEAT" on your taxes to avoid paying them is "CRAZY".
Successful dentists and lawyers make big money and find the best accountants to enjoy the majority of it. These Republicans are just so far gone with non-sense, uuuuugggghhhh!!!
That's the beauty of the free market!
I'm not an accountant or a tax expert, but I am a thinker. I can tell you whether the higher rate is on the amount over $250,000 or on the whole amount, the net result is they're paying in more. Of course there aren't going to be enough "rich" people to cover the costs of bailing out predatory lenders or now to bail out their victims too. So, the tax hikes will get down to people like me. What I sense from these posts and comments is a lot of anger and envy. Someone makes more than I do, and that's not right.
This dentist and lawyer aren't the idiots. I am, for thinking Obama was actually going to do something different (for the better) than his predecessor.