Semantic Shifts and the Marginal Tax Rate

My husband and I like to rent cars that have satellite radio, in large part because we have a sick fascination with the channel “Patriot Talk”.

One trip home from Ottawa a while back they were telling the story of a couple who were debating whether or not to close their business for the last couple months of 2012 because their profits in those months would push them into a higher income bracket, which would mean that it would be revenue neutral for them to stay open if their year’s income were to be taxed at the higher rate.

At this point some of you will see where I’m going with this and others will not, because an understanding of where the fallacy lies in the above story relies on an understanding of the marginal tax rate system, which is super boring. Even when I asked my lawyer husband if he could identify the reason the story was, at best, in error or, at worst, an out and out lie, he could not. And that’s why Patriot Talk can get away with what they do, and why it’s a perfect illustration of the power of the “semantic shift” fallacy.

The couple contemplating shutting down their business are originally talking about getting knocked into a new tax bracket, and then go onto complain about all of their income being taxed at a higher absolute rate. And while both of these claims are true, the semantic shift leads the casual observer to believe that the marginal tax rate and absolute tax rate are the same or are at least going up by the same amount, which is not accurate.

To illustrate: if I make $50,000 one year and the lowest marginal tax bracket is $30,000 at 15%, then the next marginal tax bracket is $45,000 at 25%, then the next marginal tax bracket is $60,000 at 30%, then my income will be taxed at 3 different rates. The first $30,000 of my income will be taxed at 15%, the next $15,000 will be taxed at 25%, and the last $5,000 (for a total of $50,000) will be taxed at 30%. Although my absolute tax rate (19.5%) is higher than the absolute I would have paid if my income had been $44,500 (18.5%), it is still worth it for me to make the extra money because my net income would be $40,250 v. $36,250.

So: either the couple thinking of shutting down their business are full of shit or they’re getting TERRIBLE financial advice. It is always, with the tax system that exists, beneficial to make more money. Nothing Obama did would change that. Granted, the cost/benefit consideration of take-home income versus staying home from work and spending time with family might shift for a lot of people if their income over, for instance, $1,000,000 is being taxed at a rate of 80% or some other exorbitant rate. But it is highly unlikely that a 5% tax increase in the top marginal tax rate would actually discourage anybody from continuing their pursuit of wealth.

Along the same lines, near the end of the 2012 tax season, a pundit on Fox News started going on about how much the absolute tax rate had gone up for the general population under Obama. Upon closer analysis of the information on which this assertion was based, it becomes clear that the actual reason for the increase of absolute taxation of the general population is because the general population was making more money as the economy began to recover under Obama. The semantic shift here, as before, is between “paying more taxes” and “being taxed more”. Because the headline “People earning more money under Obama” is not a good headline for Fox News, the semantic shift fallacy is used to great effect in changing the headline to “People paying more tax under Obama”.

More commonly, you’ll hear people casually change “good” to “great” or “bad” to “worst” in order to emphasize their point, and there are further shades of grey in between. But in any case, semantic shifts are particularly insidious because not only do they inherently rely on the shift being slight enough to evade detection, they also tend to be highly technical in nature and, therefore, require a certain level of expertise to identify on the fly. Unfortunately these small distinctions can make all the difference to how one understands the world around them. It’s for this reason that we must always consume media critically, but also why it’s so important to always listen carefully when engaging in conversation.

Posted in: Progress

1 thought on “Semantic Shifts and the Marginal Tax Rate Leave a comment

  1. The Pin Up Philosopher Blog – Come for the gratuitous boob shots in the OOTD posts, stay for the nuanced discussion about tax policy.

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