tax hikes and tax preparers

There’s been a lot of hullabaloo about Obama’s proposed tax increase on people earning more than $250k. The fact of the matter, as Daniel Gross points out, is that the increase is on the money made above $250k, so that you get taxed at the higher rate only on (your income – $250k). Nevertheless, there has been some handwringing (reported on TV) from people who are near this magic threshold, saying they are going to try to earn less so they fall below $250k, which leads to thing like this:

That dentist eager to slash her income from $320,000 to $250,000 would avoid the pain of paying an extra $2,100 in federal taxes. But she’d also deprive herself of an additional $70,000 in income!

I was puzzling over why these people seem to have no idea of what the tax change means for them when I heard Jeremy Hobson (who went to Uni High with me!) on the radio this morning:

About 60 percent of Americans still go to a professional for their tax needs. That includes chains like H&R Block and Jackson Hewitt — and CPAs. The other 40 percent do their taxes manually — with the majority of those people heading online.

I’m betting the percentage of people making above $250k who don’t do their own taxes is even higher than 60%, which explains it all — those people don’t need to know how the tax system works. And so they all go running to Grover Norquist.

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4 thoughts on “tax hikes and tax preparers

  1. I’d be careful about equating “smart” and “understanding the tax code.” There are a lot of very smart people who are not self-taught tax code wizards like our father. Generally speaking, if you’re making above $200K, the odds are pretty good that you’re not getting a W-2 form. Most likely, you are sole or part owner of a business (like a law firm or medical practice) or some compensation comes in things like stock options, etc. that require an accountant to deal with.

    That said, a lot of the hand-wringing is ridiculous, much like the idea that estate tax kills wealth.

  2. Oh I don’t think these people are not smart. They are just ignorant of how the tax system works, because they paid someone else to know that for them.

    I was confused before about why there was so much hand-wringing and panicking, but the statistics on tax prep give an explanation.

  3. I think you might be simplifying many people’s objections. Some people merely object to paying a certain marginal amount on a dollar, and would rather have the extra free time instead of what portion of the dollar the new tax rate would leave them with. Even if I leave my taxes with someone else, that doesn’t mean that the new tax rules won’t change my behavior in a rational manner. If I go to a tax preparer, I still need to know how the tax system works in order to make all sorts of decisions, from investment to home-buying to whether or not it’s worth my time to try to earn additional income. And if I make lots of money, I’d be insane not to either inform myself or find tax preparer who informs me about relevant tax code.

    If it were really true that this were all just a simple misunderstanding, don’t you think that the millions who mobilized for Obama would be out there explaining it all to friends, on the web, etc.? (Then again, so many of them live in New York and California, where a $250,000 couple is middle-class, that they might not be that motivated.)

    Anyway, it’s not as though there’s just one side doing the “misunderstanding.” The “$250k” is for married folks, which not all of us are; this isn’t the only inaccuracy regarding that number. And “Joe the Plumber” got knocked down (illegally in some cases) for asking Obama a simple question about his hypothetical tax situation (as someone who aspired to one day own a business) rather than his actual tax situation (where he was well under $250K, as was soon widely known and ridiculed).

    In any event, there’s not enough money to skim off the top to pay for Obama’s spending plans, so it’s no wonder folks are anticipating higher taxes, even if they aren’t coming before the next Congressional election.

  4. No, it’s kind of clear that someone who says “Oh I’m going to take fewer clients because that way I will have more spending money leftover” doesn’t actually understand marginal taxation. “Of course” you want to have more of your money around and pay lower taxes, but the particular panicked nature of handwringing indicates a fundamental misunderstanding.

    The same happens on the other side when the wiretapping issue prompted screams of 1984 and Brave New World. I don’t think holding up the treatment of Joe the Plumber is quite as strong an argument.

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