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.
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.
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.
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)
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%.
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.
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.