Understanding Marginal Taxes

The Bush administration passed temporary income tax cuts that automatically expire at the end of 2012 by law and return to the levels of the Clinton administration.  The Obama administration wants to let the tax cuts expire only on couples who make more than $250,000 and cut taxes income below $250,000.  Obama's proposal would allow the Bush administration law to raise the marginal income tax rate only on income over $250,000 from 35% back to 39.6%. 
1. Approximately how much would Obama's new law raise taxes on someone making $250,111 compared with Bush's tax rates before they automatically expire?  

1. $0
2. $5
3.  $100
4. $12,000
5. $100,000

2.  Suppose you are earning $250,111 which is $111 over the threshold for the Obama proposal.  Could you increase your take-home (after-tax) income by earning $112 less?
3. When Bush's tax cut expires, millionaires will see a huge tax increase when the top rate goes from 35% to 39.6%.  Would Obama's new law cut taxes on millionaires relative to current law which brings back Clinton's rates?

The answers are extremely simple, but the issue confuses nearly everyone:

Here I went and wrote a whole column about House Republicans exploiting public ignorance of how marginal tax rates work to bamboozle people about the impact on small businesses and I read (via Jon Chait) that Democratic Senators don't understand this either:

ANSWERS:
1. $5
2. No!  You always keep more income by earning more.  That is why we call them MARGINAL tax rates.  They only affect additional income. 
3.  Millionaires get a larger tax cut under the Obama plan than anyone else as you can see in the above graph.  This is because they get the full tax cut on their first $250,000 of earnings and only pay the higher tax on income above $250,000.  The Obama plan cuts taxes on all Americans by more than the GOP plan except for the richest 4% of Americans.

Tax History: Record Largest Peacetime Income Tax Hike

 Americans used to be completely comfortable with making the rich pay high taxes.  in 1944 the top income tax rate was 94% and it mostly remained at 91% for two decades until the (liberal Democrat) Kennedy tax cut of 1964 whereupon it dropped to 70% for the next two decades!  Culture changed. 
Alex Raskolnikov gives another historical example of tax culture in the US:

Alex Raskolnikov: [Conservative Republican] Herbert Hoover presided over the largest tax increase in peace time history of the United States. For top earners the rate went up from 25 percent to 63 percent. But not everyone in top 1 percent was paying 63 percent. In fact after the Hoover tax increase, there was a very wide range in rates between people who just barely made the top 1 percent and people who were like Andrew Mellon, like really, really the richest Americans. The range was from 8 to 63 percent. So people who just made it into the top 1 percent were facing the 8 percent rate -- that was not particularly high. The wealthiest of the wealthy of the wealthy were facing 63 percent. And this is 1931!
Paul Solman: Do you read anything into this? I mean, that perhaps the Great Depression continued for another nine years because rates were jacked up that high?
Alex Raskolnikov: Well, as always my answer is going to be that we're not entirely sure, and it's complicated, and there were many factors going into Depression. Tax policy was only one of them, so it's hard to know. But I would say that this range of rates for top 1 percent from 8 to 63 percent is kind of illuminating about the debates that are going on now. When you think about Warren Buffett, who says that he thinks we should raise taxes to top 400 taxpayers, and the debates in Congress about raising taxes on those with an income over a million dollars, that's about 400,000 to some arguments that the top rate should go up for the top 1 percent, that's over a million taxpayers. To Obama's points that we should let Bush tax cuts expire for people with income of $200,000 that's well below, quite below top 1 percent. That's the kind of differentiation that we don't have now that we used to have and that was very profound when Hoover raised the rates.
In 1944 the average rate paid by the top 1 percent of households was 60 percent -- meaning that these people paid 60 percent of their income in taxes. But that's not all. [President Franklin D. Roosevelt] actually wanted more. So in 1942 he suggested capping incomes at $25,000. Today that would be $350,000. That's a little under where today's top marginal rate starts. And it wasn't kind of a backroom discussion in the White House, he made this suggestion to a Joint Session of Congress in 1942.
Paul Solman: That's literally unimaginable today, right? I mean a totally different ethos.
Alex Raskolnikov: I agree, and that wasn't the only suggestion. At some point FDR considered switching to taxation of gross income. It probably would be unconstitutional, but that was sort of on the table. His Treasury Secretary, Henry Morgenthau, proposed capping corporate profits at 6 percent -- meaning taxing away everything above 6 percent. That didn't go through and capping ordinary income didn't go through, but these were the things that were being considered at the time.

Should Government Spending Go Up or Down During a Recession?

Kevin Drum:
The federal government can currently borrow money for free. In fact, better than free: inflation-adjusted rates on treasury bonds are negative for maturities of ten years or less, and damn close to negative even for longer-term bills:

Negative! The market will literally pay us a small premium to take their money and keep it safe for them for five, seven or 10 years. We could use that money to rebuild our roads and water filtration systems. We could use that money to cut taxes for any business that adds to its payrolls. We could use that to hire back the 600,000 state and local workers we’ve laid off in the last few years.
Or, as Larry Summers has written, we could simply accelerate payments we know we’ll need to make anyway. We could move up maintenance projects, replace our military equipment or buy space we’re currently leasing. All of that would leave the government in a better fiscal position going forward, not to mention help the economy.
The fact that we’re not doing any of this isn’t just a lost opportunity. It’s financial mismanagement on an epic scale.

Yep. It's worth noting that this money isn't literally free. We still have to pay it back eventually. But we'd have to pay back less than we borrowed in the first place. So we could borrow a billion dollars to build a water filtration system, get the use of that system for ten years, and then pay back $900 million. It's an incredible bargain.
This logic applies to pretty much any project we think we're going to need eventually. If we'll need it someday, the best time to build it is now, when the rest of the world will help finance it for us. This would put people to work, build some critical infrastructure, and effectively do it for less than market prices. What's not to like?
If you're curious, real treasury yields since 2011 are shown in the chart below. 5-year rates went negative in February 2011; 7-year rates went negative in July; 10-year rates went negative in December; and 20-year rates went to zero today. Only 30-year rates are still positive, but just barely.