mostly taxes

Tyler Cowen asks what San Diego has contributed to American culture. Having grown up in San Diego County (though I haven't lived there in almost 20 years), I feel obligated to respond.

He mentions Eddie Vedder (though as a San Diego teenager in the 90s, we weren't big fans of his ignoring his homeland, even though we were big fans of his band's music). Frankly, we didn't get a lot of musicians who came from and stayed in San Diego; LA is just a couple hours north, and it pulled successful musicians from its southern neighbor. (Heck, a number of my friends who are now professional musicians have relocated to LA, though I suspect most of them would rather live in San Diego). As a result, we were big fans of Stone Temple Pilots who, though derivative, claimed San Diego as their home. It's also worth mentioning Simon & Simon, which helped alleviate my homesickness freshman year of college.

For my money, KSDS 88.3, out of San Diego, is the best jazz radio station in the country. I've listened to it from New York (which doesn't have a jazz station, though you can pick up Newark's 88.3 if you're lucky) and Chicago (which also doesn't have a jazz station, though the College of DuPage broadcasts and I can pick it up if I'm going the right direction in my car).

People seem to be mentioning the Zoo (though I prefer the Wild Animal Park San Diego Zoo Safari Park). But nobody's mentioning Balboa Park, with its museums, green space, gardens, etc.

If you're there with kids, of course, The New Children's Museum is a spectacular introduction to art and artists from San Diego and Mexico.

La Jolla has a ton of art galleries (though whether they're good or not I don't know; like I said, it's been almost two decades since I actually lived there).

But if you're looking for widespread cultural influence, you definitely shouldn't look past the La Jolla Playhouse, which has originated a number of musicals that eventually found success on Broadway and in tours (The Who's Tommy was during my high school days, but there have been plenty more).

This afternoon, New York Magazine posted an article mocking tax-illiterate rich people (the "dumb rich," it calls them) worried about their 2013 taxes. The article especially mocks Kristina Collins, a chiropractor who says she's worried about the increased tax rates that, if Obama has his way, will kick in on married taxpayers who earn $250,000 or more. She says she's going to monitor her income carefully and, if she gets close to the threshold, she may shut her practice down for the rest of the year and go on vacation. As the article helpfully points out, that's a dumb objection.

To illustrate why it's a dumb objection, imagine we're in a world with two tax brackets. A taxpayer who earns up to $50,000 is in the first tax bracket and pays taxes at a 10% marginal rate. A taxpayer who earns more than $50,000 is in the 30% marginal tax bracket.

If our taxpayer earns $50,000, she owes taxes of $5,000 (that is, $50,000 x 0.1). And if she earns $50,001? Dr. Collins seems to believe that she'll owe taxes of $15,000.30 (that is, $50,001 x 0.3). Note that this would be crazy; if that were the case, you would be paying over $10,000 of taxes on your last dollar of income. That's like 1 million percent! Nobody would ever earn that extra dollar of income.

Needless to say, that's not how our tax system works. So when you earn that additional dollar, what will you actually pay? $5,000.30. See, the way it works is, you pay taxes at a 10% rate on your first $50,000 of income, and at a 30% rate on income in excess of $50,000. So if you earn $75,000 in this hypothetical world, you'll pay ($50,000 x 0.1) + ($25,000 x 0.3), or $12,500. Even though your marginal tax rate is 30%, your effective tax rate is 16.7%.

But even the Dumb Rich are sometimes accidentally right. And in this case, unless Congress notices the problem and fixes it (and forgive me if I'm not optimistic about its doing either one), Dr. Collins may, in certain circumstances, be accidentally right.

Because, while wage income is progressive, long-term capital gains, for the most part, aren't. Currently, because of the Bush tax cuts, long-term capital gains are taxed at a 15% rate, whether you earn $80,000 or $8 million.[fn] But to the extent the Bush tax cuts expire, that rate goes up to 20%. And Obama's plan would allow the Bush tax cuts to expire for everybody making more than $250,000.

But here's the thing: as far as I can tell, that jump is a cliff. That is, if you earn $249,999, you pay taxes on all of your long-term capital gains at a 15% rate. But if you earn $250,001, you pay taxes on all of them at a 20% rate.

Let's imagine that we're still under my two-rate system. You earn $250,000, including $40,000 of long-term capital gains. In that case, you owe ($50,000 x 0.1) + ($160,000 x 0.3) + ($40,000 x 0.15), for a total of $59,000. But let's say you're not as careful as Dr. Collins and accidentally earn $1 more from your chiropractic practice. Under the standard tax rules, you should pay an additional fraction of $1 in taxes (here, $0.30). But that's not what happens, because, now that you've earned more than $250,000, your long-term capital gains rate is 20%. Now you owe ($50,000 x 0.1) + ($160,001 x 0.3) + ($40,000 x 0.2), or $61,000.30. The additional dollar in income increased your tax bill by $2,000.

And it's even worse for some dividend income. Under the Bush tax cuts, qualified dividend income was taxed at a 15% rate. But when the cuts expire, dividend income is taxable at ordinary marginal rates, meaning that additional dollar of income could cause dividends to go from a 15% rate to a 36% or a 39.6% rate.

That's not how our tax system generally operates; it's expressly not how it's supposed to operate. And it may not be an issue--if the Bush tax cuts expire for all income levels, this tax cliff will not materialize (because we'll all be paying taxes on dividends at ordinary rates and capital gains at a 20% rate).

But if the Bush tax cuts only expire for taxpayers earning more than a threshold amount, I hope that Congress and the president are thinking about how to prevent the tax cliff. How? I'm not sure; the only idea I have, off the top of my head, is to figure out what percentage of a taxpayer's income exceeds $250,000, and tax that percentage of her capital gains at 20%, while taxing the rest at 15%. 

Whatever the solution, though, while I assume the Dumb Rich came to their conclusion erroneously, they accidentally caught a real problem.

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Grover Norquist, responding to the idea that if the Bush tax cuts expire on January 1, and Congress then reduces taxes back to their current rates for everybody making less than $250,000. Which, frankly, is a really stupid argument: in 2013, the top marginal rate is 39.6%.

If we get to arbitrarily choose our baseline, why are the tax rates in effect from 2003-2012 the appropriate baseline? Why not the pre-1980s top marginal rate of 70%? In that case, Congress could increase the top marginal tax rate by 30 percentage points and it would still qualify as a tax reduction.

Actually, before bed, I just want to say: I believe that Mitt Romney is a good man who wants what is best for the country, and I believe he would have worked hard to achieve his vision of the best. I disagree with many parts of that vision, and I disagree with many of his policy preferences, but that in no way makes Romney a bad or an evil person.