Wednesday, January 7, 2009

Whose Middle Class

To give Republicans something else to point to when they say "No, Barack Obama, we don't want to cut taxes that way", Mitch McConnell recently floated the idea of reducing the 25% tax bracket to 15%. As the Tax Policy Center points out (PDF), this idea only "helps the middle class" if you define "help the middle class" to mean "give a modest three-figure tax cut to those earning the median household incomes while giving four-figure tax cuts to those earning more than $359,000". What's scary, though, is that I can't figure out why this is the case. Ususally the culprit here is that the middle class pays very little income tax to begin with, but that doesn't explain why the upper middle class gets such a smaller tax break than the hyper rich. Any tax wonks out there who want to help?


John Rove said...

Essentialy McConnells plan would lower everyones rate to fifteen percent. For a lower income person they are probably paying close to fifteen percent on everything they are earning anyway. A higher income person is paying more than fifteen percent on a lot more of their income so it works out to be a tax cut for anyone who is not in the fifteen percent bracket and leaves people in the lower bracket at about the same place.

dennis said...

Here's the TPC blog.

What appears to be going on to me is actually confusion about how tax brackets work. Marginal tax rates are a step function, so the "25% bracket" is the income level where the marginal rate is 25%, not the total tax rate paid by a person with that income. Everybody pays 25% on income in that range, and that is what would be reduced to 15%, so that hits everybody above a certain level.

However, then we have to worry about the AMT. As the tax blog says, the cut tosses most of its lower-income recipients into AMT land (in fact, the proposal would increase AMT revenue by 80%), so the real beneficiaries of the cut are those taxed at a high enough total rate (i.e. those rich enough) that they avoid AMT liability even with the cut.

Nicholas Beaudrot said...

Right, I know how "marginal tax brackets" work ... I just figured that the upper middle class paid about the same amount of tax on income in this range than I thought.

The fact that a lot of folks who don't make quite so much money get AMT'd seems like a big part of it.