"Under Senator Obama's plan, the tax on income above $250,000 would increase by 3 percentage points from 33 percent to 36 percent. This means that [Joe the Plumber] could expect to see his tax bill rise by between $0-$900, assuming that this plumbing business would be his entire taxable income. If he has additional taxable income, then he would see a larger increase in his taxes."American liberals need to acknowledge that increases in marginal tax rates* create a disincentive to work and to investment. But American conservatives need to get more realistic about the magnitude of the effect.
For a long time, the top marginal rate was over 90% and was 50% as recently as 1986. One can legitimately argue that such high rates were a strain on the economy. By contrast, the top rate is currently 35% and, under the Clinton administration, was almost 40%. There's not a whole lot of evidence to suggest that small changes in marginal rates have such dire consequences. Again, Baker illuminates this point:
"In response to a few notes, we have had far higher tax rates and much higher economic growth in years past. So, Joe might claim that he will shut his business and fire his workers if he has to pay another $900 a year in taxes, but the evidence suggests that there are plenty of other plumbers who would be happy to run the outfit even if the tax rate were somewhat higher."Maybe we should calm down about this.
*Marginal tax rates are the rates on income earned above a certain point. For example someone filing individually in 2008 faces the following marginal tax schedule:
- 10% on income between $0 and $8,025
- 15% on the income between $8,025 and $32,550; plus $802.50
- 25% on the income between $32,550 and $78,850; plus $4,481.25
- 28% on the income between $78,850 and $164,550; plus $16,056.25
- 33% on the income between $164,550 and $357,700; plus $40,052.25
- 35% on the income over $357,700; plus $103,791.75
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