The Poor Rich

Yesterday I wrote that just about the only substantive thing the Republicans promise to do differently from Democrats in their recently released “Pledge to America” is to extend the Bush tax cuts on income over $250,000 a year. They pledge to do this at the expense of balancing the budget and getting the deficit under control, which is ostensibly one of their top priorities. Balancing the budget may be more important to them than passing a food safety bill in the wake of the August recall of 500 million potentially salmonella-tainted eggs, but it’s not as important as lowering tax rates for the rich.

Of course, not everyone thinks that earning $250,000 a year makes you rich. Chicago law professor Todd Henderson complains that after he pays his property taxes, sends his three kids to private school, and pays people to mow his lawn, take care of his kids, and clean his house there’s not much money left. It’s true that’s it’s not that unusual in America for someone to make more than $250,000—millions of Americans do—but what Henderson is missing that most of us don’t have as large of a house as he does and can’t afford to send three kids to private school, much less hire people to do our household chores for us. $250,000 a year is more than five times what the median American household makes—and millions more Americans can't find work at all. For most of us the things Henderson considers necessities are fantastic luxuries.

Even so, it’s easy to understand why the rich wouldn’t want to have the government take a large percentage of their income. But taxes on the rich in the U.S. are actually low both compared to what they used to be or and compared to what they are in other wealthy countries. The effective federal tax rate on the top 1%—who make well over $250,000 a year—hovers around 30%, which is substantial, but hardly confiscatory. Because capital gains are taxed differently the richest Americans may pay a significantly lower rate. And before you feel too sorry for the rich, it’s worth remembering that they’ve been getting steadily richer relative to the rest of us for years.

The other thing to remember about the tax cuts for the wealthy that the Republicans have made their top priority is that they they don’t really affect people much who are making “just” over $250,000 a year. As Annie Lowery points out, the taxes at stake are on income past the first $250,000 you make. If you make a dollar more than $250,000, they mean you would pay just 3 cents more than you would under the Republican plan. In other words, you would pay 3% more on the last dollar you made, but the effective tax rate on your entire income would change by just a fraction of a fraction of a percent. And Ezra Klein points out that the so-called “tax cuts for the middle class” are actually tax cuts on all income up to $250,000, even for people who make more than that. In other words, even if we don’t extend the tax cuts on income over $250,000 a year, people who make more than $250,000 will still get a sizable break on their taxes. Moreover, Klein calculates that if we extend the tax cuts on income over $250,000, people making between $200,000 and $500,000 will get an average additional tax break of just $409, which amounts to a break of around 0.1% on effective tax rate. People making $500,000 a year would see their effective tax rates go down just 1.5%.

Tax cuts are always politically popular. But it is truly difficult to understand why the Republicans would increase the deficit and kill worthwhile health and infrastructure programs for a tax break like this—at least until you remember that most of the Republicans’ campaign money is coming from the one group that really would benefit from the tax break: billionaires.

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