Understanding the tax-cut debate

There’s a big national debate about taxes — specifically, whether to extend some tax-rate reductions that were made in the early 2000s. One recommendation is to extend the cuts for all but the very highest income-tax payers. specifically those making more than $250,000 in taxable income annually. North Carolina Cooperative Extension economist Mike Walden explains what such a hike would mean.

“I think this is where we see that there is not a good understanding of how the income-tax system works. The way the income-tax system works is everyone’s taxable income is divided into tiers, or segments, and each segment is taxed at a different rate. And what the debate is about is that highest rate: Should that highest rate go up or should it stay the same? There seems to be consensus that the lower rate should not go up — (it) should stay the same.

“Now when you ask whether higher-income people — those at the higher level — would get a tax cut, actually part of their income would, because if we were to raise all the rates, everyone would pay more. But if we raise only the top rate, what that means is still the higher income people are not getting a tax increase on their lower segments of income. They only pay higher taxes on their top segment of income — here, $250,000 or more.

“So I think there is a little bit of misunderstanding there. Still, there are economists who say, ‘Well, this doesn’t matter. What we have to focus on is what’s called that marginal rate — what someone pays on another dollar of income.’ And they worry that if you raise that for the high-income folks, that will motivate them perhaps to invest less, work less and could actually cause, at least partially, tax revenues to go down.”