Last week president Obama proposed to extend the Bush tax cuts yet again for income under $250,000 while raising the top rate from 35% back to 39.6%. During the rest of this election season as the Republicans cry of socialism and confiscatory taxes, try to remember that the difference between Obama's and Romney's position is this measly 4.6%.
And that got my wife and I thinking. How many Americans actually understand how federal income taxes work? How many Americans could explain what a marginal tax rate is? Without any hints or leading questions, I'd wager less than 10% of us know the answer. The interesting thing is that this ignorance creates a clear political loser and winner. The less we understand about marginal tax rates the better, as far as Republicans are concerned.
Because "marginal" is a confusing word, I bet many Americans just assume that headline number is the effective tax rate. Republicans can capitalize on that ignorance by making taxes seem higher than they are. Not only that, traditional Republican claims that higher rates disincentive work appear to make more sense if you don't understand how marginal rates work. If crossing into the next tax bracket is suddenly going to make my tax bill go sky high, then yeah, I would be careful to stay just below the bracket. But that's not how it works.
If I made $251,000 for example (yeah right!), I would enjoy all the same low income tax rates I currently do. My first $8,700 would be taxed at 10%, my next $27,000 at 15%, and so on. Under President Obama's plan to raise taxes on the rich, I would pay that 39.6% top rate on a grand total of...$1,000. Only my 251,000th dollar would be taxed at the highest rate.
Americans already think that in the interests of fairness the rich should pay more. If people understood the marginal tax rate system support for President Obama's proposal would probably be even higher. The Obama campaign should frame the issue not just as the "rich paying their fair share," but as being fair in a deeper way. There's a sense in which we all pay the same rates; some of us just earn less and so don't qualify for the higher rates. It's not people that are taxed at different rates; it's income.