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Comment by gojomo | Hacker News Reader

This behavior is not classically rational, but as experiments like 'The Ultimatum Game' [1] show, people aren't rational in such matters. They will accept less for themselves if they feel they're being treated unfairly.

Some people feel progressive taxation is unfair. Even if you think it's fair, you might have objections to tinkering with the level of progressivity to buy votes, or in times of crisis, or in times when the politically-favored (be they defaulting homeowners, too-big-to-fail banks, or those running agencies and projects fortified by stimulus spending) are drawing extra billions (trillions?) from public funds.

So while these >$250K earners are not being hyperrational after-tax income maximizers -- and hardly anyone is -- they are behaving in a very typical human way.

[1] http://en.wikipedia.org/wiki/Ultimatum_game

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That's plausible and interesting, but it's not what the story says. The story says these people believe that if they gross less than $250k, they will somehow net more money than if they grossed more than $250k.

I could not find any quotes in the ABC story that unambiguously indicate the taxpayers think they would net more after-tax money with a lower income. The closest is the initial Louisiana attorney, but even there it's clear the main motivation is resentment -- and the "give it all away" comment is hyperbole.

Meanwhile, the tax accountant quoted on page 2 allows that it's possible a discontinuity with regard to deductions could create a situation where you would net more by reducing your income. The tax code is gigantic and buggy; it's not out of the question that a few taxpayers, in certain narrow situations, sometimes face marginal rates over 100%.

In any case, my point is not with an overly-literal interpretation of the ABC story. It's that this parade of commentators throwing around words like 'idiot' -- starting with Chait at the TNR piece and continuing here -- are the real know-nothings.

This taxpayer behavior is not idiotic; it's evolved human behavior, in the presence of perceived unfairness, that may serve long-term survival strategies.

Conceded.

I just did my taxes Saturday night, so here is real experience, not theory. My household income is near the point of this discontinuity.

Last year, my wife and I made $X more than the previous year. The end result on our taxes was that we paid about (0.75)X more in taxes. This was due primarily (as the account explained to us) to a combination of increasing hit due to AMT as well as declining mortgage interest deduction as we approach the end of our mortgage.

With an apparent marginal tax rate of 75%, what's the point of working harder? And, in fact, if I can stand to lose, say $1,000 in income in order to buy myself $4,000 worth of "life", that seems like a good investment.

Please don't find it insulting when I say I find your numbers hard to believe. A claim of a marginal tax rate of 75% without any solid numbers is hardly doing justice your thesis. If you'd give a more detailed breakdown, your case would not seem so dubious.

Please go back and read more precisely. I didn't say that I had an actual marginal tax rate of 75%, I said "an apparent marginal tax rate of 75%", using that "apparent" qualification quite intentionally.

Looking at the picture with an understanding of what's going on, it's clear that there's a degree of apples and oranges here. I don't know what my tax liability would be if I were to take the previous year's data and apply the current tax rules to it, but that's what would show what my actual marginal rate is.

What I'm trying to illustrate is that the real-world experience of a taxpayer, under the regime of a byzantine tax code, can (and did, in my case) experience a severe dis-incentive to further productivity. And the farther the tax code moves in a "progressive" direction, the more frequently this will be true.

Incentives matter.

(Sorry, I'm not going to announce all my financial data on the Internet)

> A claim of a marginal tax rate of 75% without any solid numbers is hardly doing justice your thesis.

The top marginal rate is around 40%. SSI is around 15%. CA's top is around 10%. Add in some deduction phaseouts and it's easy to see 70%.

Top marginal rate is 35% now.

The SSI stops after 105k (or so), so it is immaterial, because the marginal fed tax rate is 28% at that point.

True that state income tax is a big one, for some states. So I completely didn't bundle that in my estimate.

Phaseout deductions never _increase_ marginal tax rates, so also immaterial.

Nevertheless, exceeding 50% marginal tax rate with today's tax rates is unlikely.

> Top marginal rate is 35% now.

There's a surtax that puts it at 39+.

> The SSI stops after 105k (or so),

Today.

> Phaseout deductions never _increase_ marginal tax rates, so also immaterial.

Phaseouts affect the amount of income taxed and thus affect the amount of taxes due for a given increase in income. Suppose that earning $1k more costs me $300 in deductions due to phaseouts. The result is that my AGI has gone up by $1.3k. Assuming no bracket change, the taxes owed because of that $1k increase is 1.3x the bracket rate.

Let's put some numbers on it. Suppose that the tax rate for that bracket is 10%. That's $100 for the $1k and $30 for the $300 for a total of $130 owed. Do you really want to argue that the marginal rate for that $1k is not 13%?

I also left out sales taxes. Their effect depends on what the mix of goods purchased (at least some food is tax free in most jurisdictions while gas, tobacco, and booze isn't) and the average tax rate up to that point.

For a state like CA, with sales taxes typically over 8% and soon to be 9%, that can add another 3-5% to the marginal tax burden.

Don't forget the AMT. It's the granddaddy of all phaseouts.

Not necessarily. Maybe the lawyer values her time at $100/hr. Say she bills $150/hr to her clients. Then, before she reaches $250,000 she makes $105/hr (roughly). But for each extra hour worked after she has made $250,000 in a year, she only earns $80/hr. At that rate, she may prefer to spend time doing other things.

That is true. If I was a high earner I would rather work less days a year (or work in different countries). After you have a certain amount of money, the extra amount does not increase happiness significantly - so it is generally not worth working for that money.

Isn't that just relative utility? I'm not sure what that has to do with marginal tax rates.

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