Words Matter

 

Sticks and Stones

Sticks and stones may break my bones,         

but words will never break me.

Some words can hurt. Not understanding that marginal tax rates are not the same as the effective tax rates can hurt the decisions that we support.

Taxes are meant to raise revenue for the government.  They are fair if the amount raised from each individual is fair.  That is why we have a progressive tax system.  Jesus observed in the Bible that the “Amen, I say to you, this poor widow put in more than all the other contributors to the treasury. For they have all contributed from their surplus wealth, but she, from her poverty, has contributed all she had, her whole livelihood.”

Taxes then might be considered fair if they are from the surplus wealth not from our whole livelihood.  So what is surplus wealth?  Might that be marginal income and not the whole income?  In the 2020 tax year, the highest US tax bracket is assessed on incomes of more than $622,051 for households filing jointly.  The marginal tax rate for this bracket is 37%.  However that is NOT the tax rate on the income below $622,051 for this same bracket.  Those taxes are $167,307.50 which is less than 27% of the income below $622,051. Referring to the marginal rate as the name for the tax bracket distorts from the fact that it is not the actual tax rate ( which i probably called the effective tax rate by an accountant).

Calling the marginal tax rate the effective tax rate, is probably as intellectually honest as referring to an estate, or an inheritance, tax as a death tax.  Yes, you have to be dead to have an estate or to bequeath an inheritance, but the tax is on the estate or the inheritance, not the death. 

The lowering of the marginal tax rates began in earnest in the 1980s with the passage of Economic Recovery Tax Act.  http://dbeagan.blogspot.com/2020/06/taxman.html .  Before he became the vice president, George H.W. Bush referred to supply side economics, which was the basis for lowering the marginal tax rates, as voodoo economics.  Since adopting supply side economics as the basis for tax policy, the growth of income in the US has been less than it was before, and the gap between rich and poor has increased.  When supply side economics was adopted as state tax policy, by then Kansas Governor Brownback in 2012, it  achieved none of its stated goals, and was eventually abandoned.   Lowering state taxes was claimed as a way to simulate the economy.  Lowering taxes may stimulate the economy, but lowering tax rates is not the same as lowering taxes, unless all tax rates are lowered equally.  We understand that there is a difference between acceleration and speed.  The fact that both effective and marginal tax rates include the word tax does not mean they are the same.  Acting like they are the same is an example of when words can hurt you.