They’re called marginal tax rates for a reason

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Occasionally, we’re reminded that folks can make quite a bit of money, but that doesn’t mean they have even the most rudimentary understanding of personal finance (via Kevin Roose).

Kristina Collins, a chiropractor in McLean, Va., said she and her husband planned to closely monitor the business income from their joint practice to avoid crossing the income threshold for higher taxes outlined by President Obama on earnings above $200,000 for individuals and $250,000 for couples.

Ms. Collins said she felt torn by being near the cutoff line and disappointed that federal tax policy was providing a disincentive to keep expanding a business she founded in 1998.

“If we’re really close and it’s near the end-year, maybe we’ll just close down for a while and go on vacation,” she said.

This comes up from time to time, and it never ceases to amaze me. I long assumed that if you’re fortunate enough to be in the top 2 percent, you can at least afford an accountant or financial advisor to explain the basics to you, but I’m afraid this Virginia chiropractor isn’t the only one who’s deeply, almost shockingly, confused.

Let’s once again explain how the tax system works:

We have marginal tax rates that apply to income levels, with higher rates applying specifically to higher income. If President Obama succeeds in raising rates on income above $250,000, the higher rates will only apply to income above $250,000.

In other words, if your family makes $255,000 a year, under Obama’s policy, you’d get a tax break on your first $250,000, then pay slightly higher rates on just the other $5,000. If your family makes $260,000, you’d pay the slightly higher rates on just the other $10,000. There is no threshold at which the upper bracket suddenly applies to all income.

What Kristina Collins told the New York Times is gibberish. She and people like her are talking about voluntarily lowering their own incomes, on purpose, fearing more money would leave them with less money.

There may be some wealthy-but-ignorant folks who intended to go out of their way to make $249,999.99 a year because they’re afraid of a new tax burden, but there is literally no mathematical way for this to make sense. Under every possible scenario, those who earn more income will have more money – there are no exceptions – and those who choose to “go on vacation” instead of making more money will do nothing except hurt their own bottom line.

Postscript: When it comes issues like taxes and personal finance, it’s easy for people to get confused, and it becomes all the more important for news outlets to provide the public with the facts. In this case, not only did a Virginia chiropractor say something foolish to the New York Times, but the article made no effort to explain why her comments didn’t make sense. That’s a real shame.

They're called marginal tax rates for a reason

Updated