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Barack Obama has said that he will eliminate all income taxation for senior citizens making less than $50,000 per year. Putting aside the debate on whether this is a good policy, it might be worth exploring how such a policy would be implemented. It sounds simple enough: if you're a senior and your income is less than $50,000, then you don't pay income taxes (note that the threshold is for total income, which is greater than taxable income). But what happens when your income crosses that threshold? Obama's plan does not address this question, and it turns out to be an important question.
Consider an example. A husband and wife are both seniors with a combined income of $49,500. Under Obama's plan they would pay no income taxes. But then they decide to sell their coin collection. They sell the coins for $500 and report the capital gain to the IRS. Since only those making less than $50,000 are exempt, they expect they might owe a few cents on the excess $1 of income over $49,999. But when Tax Day rolls around they are hit with a tax liability totaling a whopping $3,585. Now instead of having an income of $49,500 and owing no tax, their income is $50,000 and they owe $3,585, putting their after-tax income at $46,415. They would have been better off not earning the extra money at all.
The reason this happens is that Obama's plan, as stated in his official campaign publications, throws taxpayers directly into the 15% bracket as soon as they cross the $50,000 threshold, making them fully liable for income tax on all of their taxable income (around $29,000 for seniors after the standard deduction and personal exemptions). As seen in the above example, the extra income actually has a negative net effect; the modest $500 gain turns into a net loss of over $3,000. In this way, the policy acts as a "cliff," suddenly slamming the taxpayer with a substantial tax bill and reducing his after-tax income well below what it would have been if his income had never increased (see Figures 1 and 2).
To better understand the cliff problem it is necessary to clarify two different ways of defining tax rates. A marginal tax rate is the tax rate on the next dollar of income earned. The rates associated with the federal income tax system are marginal tax rates. Only the income that exceeds the bottom of a given tax bracket is taxed at that bracket's marginal rate. The rest is taxed at lower marginal rates.
To gauge the cliff effect, economists use a measure called the effective marginal tax rate (EMTR). The EMTR equals the change in taxes divided by the change in income between any two income levels. The EMTR only becomes distinct from the marginal tax rate when there are abrupt changes in tax liability, as in the case of the elderly couple discussed above. In that case, when their income is $49,999 their taxes equal zero, but when their income is $50,000, their taxes equal $3,585. At $49,999 the marginal tax rate is 0% because the last dollar is not being taxed, and the EMTR is 0% because there is no change in taxes up to that point. The marginal tax rate once they cross the $50,000 threshold is 15%, because the fifty-thousandth dollar by itself is taxed at 15%. However at that same point all the previous dollars become taxable at their respective marginal rates, which results in an immediate and drastic jump in taxes from zero to $3,585. The EMTR at $50,000 is then 358,500% (change in taxes / change in income: [$3,585 - $0] / [$50,000 - $49,999] = $3,585 / $1 = 358,500%). The fifty-thousandth dollar has an effective marginal tax rate of 358,500%, or $3,585. The EMTR quantifies what is intuitively obvious: that a $3,585 increase in taxes associated with a $1 increase in income is excessive and unfair.
Do you know what a senior making $49,999 in a McCain administration would pay?
It sure seems like this is an encouragement to NOT attempt to make any money and improve one's situation. Then again, that's been the result of the welfare system in this country for decades so I guess it's not that surprising.
A new federal regulation allows employers to reduce or eliminate health benefits for retirees when they turn 65 and become eligible for Medicare. Although that will cause distress for some, it is a welcome step that could help slow the deterioration of employment-based health insurance.
Originally posted by ProfEmeritus
Your first sentence above is absolutely correct. I don't consider this welfare in the sense that we're talking about seniors that have worked all of their life, and paid taxes, and are now having a hard time making ends mee. You might say, wait, they are making $50,000, and can't make ends meet?
The reason this happens is that Obama's plan, as stated in his official campaign publications, throws taxpayers directly into the 15% bracket as soon as they cross the $50,000 threshold, making them fully liable for income tax on all of their taxable income
About the Tax Foundation
The mission of the Tax Foundation is to educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government. From its founding in 1937, the Tax Foundation has been grounded in the belief that the dissemination of basic information about government finance is the foundation of sound policy in a free society.
It would work just like the system today. Even someone making a million a year only pays 10% on the first $10k or so of income; 15% on the next 20k; 20% on the next 30K; 25% on the next 40K; and so on. So for Obamas plan 0% for the first 50K; and then appropriate tax rates on the balance.
The 15% is only for income above $50,000. How about a bit of common sense already?
Tax experts across the political spectrum also fault the Obama plan's abrupt $50,000-a-year threshold. As described by the campaign, seniors making, say, $48,000 would pay no income tax, while someone with income slightly more than $50,000 could pay several thousand dollars in income taxes. Seniors nearing the $50,000 threshold would have incentive to quit working.
My business can't stand anymore of the GOPs economic model that favors the big corps and sticks it to the small business man. I'm facing Chapter ll and about to lay off my remaining workers as I type this. I was hoping to sell my small business and retire but now thanks to W and his crew, that's impossible.
Section 7. All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.