For the last four years, President Obama has been pushing his plan to raise tax rates on people’s income over $250,000, but a new poll indicates that most people still don’t understand one of the plan’s most basic concepts.
OK, it’s a poll conducted by my journalism grad students at NYU, and it’s not highly scientific. But I can say with a reasonable degree of certainty that it’s more accurate than the Gallup and Rasmussen polls were about the election.
Here’s the Obama plan in brief. The Bush tax cuts would be extended for households with an annual income under $250,000 (or $200,000 for individuals), but the tax cuts would expire on any income above $250,000. That means, for example, if you make $300,000, your tax rate would rise a few percentage points, to the Clinton-era rates, but only on the portion above $250,000; in this case, only on $50,000. Bottom line: no one—not a billionaire, not someone making $251,000—would have to pay more taxes on that first $250,000.
There’s a widespread misconception, however, and it’s causing a lot of unnecessary fear. It’s the faulty belief that if your income is above $250,000, you’d have to pay the higher rates on all your income, as if you were suddenly being moved entirely into a higher tax bracket. That is wrong.
But our poll—which, as far as I know, is the sole poll specifically on this $250,000 question—suggests that most people are making this mistake.
When my fourteen students asked five people each (one asked four) how the tax plan would work, they found that of the sixty-nine respondents
46 percent incorrectly said that one’s entire income, including the first $250,000, would be taxed at higher rates;
37 percent correctly said that only income over $250,000 would be taxed at higher rates; and
17 percent said they didn’t know.
So what we have here is a hefty 63 percent who were either wrong or didn’t know how the tax-rate raises would work.
You can say the sample size was small (agreed) or “skewed”—NYU students, naturally, talked to a lot of New Yorkers—but the students didn’t go looking for people who couldn’t do simple math. One student said, “All of the people I spoke with are college educated, and three out of five have advanced degrees. The only person who knew the correct answer, though, was someone who works directly in finance and who is currently getting an MBA. He understands tax regulations professionally.”
And our poll is bolstered by news accounts of people making financial decisions based on their erroneous belief that $250,000 is some do-or-die, cursed number.
For instance, The New York Times recently reported on a chiropractor in McLean, Virginia, who said that
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.
Others have explained why this sort of thinking is utterly fallacious. But it’s not just the public’s distaste for details, or math, that is leading people to cut off their income to spite their taxes.
You can also blame the media and Obama himself.
On Tuesday, Rachel Maddow took up the chiropractors’ story and rightly scorched the Times for not explaining that the couple is dead wrong. By casually referring to the woman’s worry about “being near the cutoff line,” the Times in effect seconded her faulty notion. Same thing happened back in 2009, Maddow noted, when ABC News reported on, but didn’t correct, an attorney who wanted to make $299,999 and not a dollar more for fear she’d be hit with tax hikes on the entire thing. (ABC later issued a correction.)
But Obama also shares some responsibility for the confusion: It’s his healthcare messaging problem all over again, though writ small. Yes, he sometimes explains that taxes will rise only on income over $250,000 or that no one will see tax hikes on their first quarter-million. But he hasn’t done so consistently or forcefully. More often he short-hands it, as the media do, talking about raising rates on people making more than $250K rather than on their income over that amount. (And muddling it all, for Obama and the rest of us, is the whole endlessly reversible syntax of the debate—we’re alternatively allowing tax cuts “to expire” or “raising rates” or “extending” Bush, and so on.)
The Obama team not only needs to explain, repeatedly, how the plan works, they need to acknowledge that a common misconception is out there and that it’s worrying people needlessly.
Obama could also use a killer metaphor, something as potent as “death panels” was against healthcare reform, but one that’s actually accurate.
For more on economic policy, read William Greider’s endorsement of Ben Bernanke for Treasury Secretary.