It’s time for a pop quiz, there’s a blast from the past. I know that for too many people those words in any class particularly math or science still brings pangs of anxiety. You thought that after you left high school that you would not need to understand such things as “story problems”. Then you found that the whole world was one large story problem. What if I drive X number of miles an hour, how long with it take me to get to Chicago etc? How much money should I leave as a tip for a dinner for two at my favorite restaurant? Now ABC news has reported that some individuals and families are trying to figure out how to avoid a tax increase proposed by the Obama administration.
“A 63-year-old attorney based in Lafayette, La., who asked not to be named, told ABCNews.com that she plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law.
“We are going to try to figure out how to make our income $249,999.00,” she said.
“We have to find a way out where we can make just what we need to just under the line so we can benefit from Obama’s tax plan,” she added. “Why kill yourself working if you’re going to give it all away to people who aren’t working as hard?”
But Gary Schatsky, a financial advisor and the president of NY-based Objectiveadvice.com, said that reducing your income won’t help a great deal because of the way the country’s tax system is set up.
“Just going over $250,000 doesn’t mean it impacts your tax liability for every dollar before that,” said Schatsky, “It impacts you at the margin.”
Marginal or graduated tax systems like the one in the U.S. means only the money earned over a certain amount — $250,000 in the case of Obama’s proposal — will be taxed at an increased percentage.
For instance, for a person earning $350,00, the first $250,000 of income would be taxed at lower tax rates, while the last $100,000 would be taxed at Obama’s higher rate.”Only the incremental earnings above [a quarter of a million dollars] are taxed at a higher rate,” said Schatsky.
Colorado Dentist Sharon Poczatek argued that by reducing her income from her current $320,000 to under $250,000 by having her dental hygienist work fewer days and by treating fewer patients, she would avoid paying higher taxes on the $70,000 that would be subject to increased taxation if Obama’s proposal is signed into law.
But Colorado dentist Poczatek says those who support the increase in taxes misunderstand what it means for those who will end up paying more.
“I’d like these people to know that we pay a lot of taxes, and have been paying a lot of taxes through the past administration,” said Pcozatek.”We make a lot of money, it’s true, but we also already pay a lot of taxes,” she said.”So maybe we got a little bit successful but we worked very hard,” she said.
“It’s taken us over 30 years and it didn’t happen overnight. Every day is a lot of work.
Ok now, here we go how much less money would the dentist earn if the marginal rate increased from 33% to 36%? First of all the difference would only be in the 70,000 dollars over the $250K (she is already paying the same tax rate on the quarter million dollars under either tax policy). This is true because marginal rates only apply to the amount earned over the income bracket for that rate. Mathematics allows one to determine that a 33% tax on $70k would allow the dentist a profit of $46,900. While A 36%, tax on $70k would yield a profit of $44,800. The additional tax burden would be $2,100. This dentist would decide not to earn an extra $44,800 because the government is going to get all the extra money? Wow, that is almost too hard to believe. Me thinks that she has been listening to “Joe the Plumber” too much.