on "I'm going to earn 249,999.99 to avoid paying more in taxes" story

[acroyear]

Good Math, Bad Math : Tax Thresholds: Why the horror stories about the Obama tax plan are lies:

The idea behind this, and similar stories, is that raising the income tax rate on people earning over $250,000 per year creates a threshold, where earning more than that threshold will result in your taking home less after-taxes pay than if you earned less.

How could that happen? (I'm making up nice round numbers here to illustrate; these have no relation to real tax rates.) Suppose that the tax code was set up so that if you earned less than $250,000, you paid 20%; and if you earned more than $250,000 per year, you paid 30%. Under that system, if you earned $249,000 per year, you'd pay $49,800 in taxes, for an after-taxes take-home of $199,200. If you earned $251,000, then you'd pay $75,300 in takes, for an after-taxes take-home of $175,700.

So if taxes actually worked this way, then there would be a range of incomes where there would be a strong motivation to keep your income smaller, in order to avoid crossing the threshold - because earning more would translate to earning less after taxes.

The ABC story, and all of the others I've been seeing/hearing have either implied or directly stated that that's how our tax system works - and that therefore people earning close to $250,000 are frantically searching for ways to keep their income below the horrible $250,000 threshold.

The problem is, that's not how our tax system in the US works. Anyone who pushes this story is either too dumb/uninformed about how US income taxes work to be commenting on it, or they're liars.

The way that the US system works is that there's a base rate of taxes. You pay the base rate on all of your income up to a threshold. When you cross that threshold, the tax rate on the part of your income above that threshold is increased. The Obama proposal is to add a new threshold: the tax rate on the part of your income above $250,000 would be increased - not the tax rate on the entire thing.

To go back to our example, imagine that $250,000 was the only threshold, and that the base tax rate was 20%, but that the rate on income above $250,000 was 30%.

If your income was $249,000, then your tax bill would be the same - $49,800, for a take-home of $199,200. If your income was $251,000, then you'd pay 20% on the first $250,000, and 30% on the $1,000 above $250,000. So your tax bill would be $50,000 + $300 = $50,300 - for a take-home of $200,700. Of your extra $2,000 in income, you'd take home $1,500 - or 75%.

This story is a lie, plain and simple.

And these exact same people complained using exactly the same bullshit story when Clinton first proposed the upper-bracket tax hikes that got us where we are today.