As Robert Reich reminds us this week, the egalitarian reality of marginal tax rates is largely obscured by the manner in which tax policy proposals are articulated by politicians and reported by the media. This has various bad outcomes. It can lead people to misapprehend the monotonic nature of after-tax income as a function of pre-tax income, as with the silliness of those who attempt to tune their income to exactly $249,999. Moreover, one can draw a straight line from the kind of tax talk that dominates discussion these days to the cries of “class warfare” that emanate from the right whenever an increase in the top marginal rate is contemplated.
This is, in essence, a linguistic problem. Marginal tax rates apply to portions of income, but they are almost invariably described, reported on, and reasoned about as if they applied to people. Thus, we get sentences like this one from the New York Times this week: “Mr. Obama said his proposal this week to extend the Bush-era tax cuts for families making up to $250,000 would allow his hosts, Jason and Ali McLaughlin, to save as much as $2,000 in taxes next year.” By framing the cut as being “for families” with a particular property (earning less than $250,000), rather than “for portions of income” with a particular property (being under $250,000), the report invites the false inference that families making more than $250,000 wouldn’t enjoy the same rate-cut extension on the relevant portion of their income. In reality, of course, the extension would apply to every family’s income up to $250,000: this is simply how marginal taxation works.
It is easy to imagine reasons why we talk about taxes in this ultimately misleading way. It can be politically expedient, as when Obama trumpets the savings a particular representative family would reap. It may be seen as an indispensable dumbing-down measure, of the local-TV-news “…But how does this affect YOU?” variety. It certainly grabs one’s attention better than “portions of income”, a dry mouthful at best. But much is lost in the translation.
We need a better way to talk about portions of income and the marginal tax rates that apply to them. As always, we need not just new terminology but a useful metaphor in which to ground its logic. Here is a suggestion: let’s talk about “income floors”. Think of income as a building: the higher the income, the taller the building. Various nice inferences automatically follow from this metaphor, owing in part to its grounding in the ubiquitous “more is up” metaphor. If you have a relatively high income, then you have a relatively tall building, with all its attendant advantages: nice view, distance from the street, etc. Even very high incomes have low portions; even a skyscraper has a second floor. Marginal tax rates apply to portions of income, i.e., to different ranges of floors in the building. Increasing the rate on high income floors has no effect on the lower floors: if you have a two-story building, you’re not affected, and even if you have a skyscraper, some sizable chunk of your building won’t be subject to the increase (i.e., the lower portion of your building won’t shrink). Anything affecting low income floors, good or bad, affects floors that everyone has and affects them equally. Anything affecting high income floors affects only some floors that only some people have, leaving their (and others’) lower floors untouched. This metaphor reflects the reality of marginal taxation far better than our dominant mode of discussion, which treats tax rates as if they applied uniformly to entire buildings.
By better reflecting the facts of marginal taxation, income floors and the income-as-building metaphor make it easier to understand the implications of particular policy proposals. The metaphor confers no obvious advantage on any faction in debates on tax policy; rather, it clarifies the terms of debate, in stark contrast to the reality-obscuring, highly personal, and often inflamed talk of tax rates applying to people. Like all metaphors, it omits a lot: for instance, it says nothing about the uses to which government puts tax revenues, thus preventing us from drawing any associated inferences. But it also gives the lie to the notion, so often propounded by those who rail against “class warfare”, that removing the top ten floors of a skyscraper might somehow turn it into a three-story walkup.