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How the Baucus Proposal Reminds Me of the Bush Tax Cuts

September 17th, 2009 . by economistmom

I’m too sleep-deprived to do a careful analysis of the Baucus plan tonight, but as I was reading over the CBO analysis of the proposal, a familiar feeling came over me.  I realized the Senate Finance chairman’s health reform plan feels a lot like the Bush tax cuts did when they were first proposed, in these ways (that I can think of tonight–maybe you can think of more):

  • The Baucus proposal contains a lot of “bipartisan” elements that (theoretically) should attract Republicans and not just Democrats to the bill.  It expands health insurance coverage (a crucial feature for the Ds) but offsets some of the gross cost of expansion with a revenue increase (excise tax on high-end policies) that removes some of the distortion caused by the current tax exclusion of employer-provided health care (hence, this gets prices a little more right–an idea that Rs, including Senator McCain, probably like more than the Ds).   The $500 billion net cost of the expansion of health coverage is offset with a mix of spending cuts ($409 billion, which Rs should prefer) and revenue increases ($139 billion, which Ds should prefer).  That “bipartisan” feel to the proposal reminds me of the Bush tax cuts, which had a mix of marginal tax rate reductions which appealed to the Rs, with refundable tax credits which the Ds wanted.
  • The Baucus proposal assumes cost savings that would occur under current law even though Congress routinely backs away from that commitment. This reminds me of the assumption of a growing alternative minimum tax (AMT) under the Bush tax cuts:  that assumption–that current tax law would be honored and AMT revenues would rise dramatically–held down the officially-scored cost of the Bush tax cuts below what their true cost turned out to be with the repeated (deficit-financed) extensions of temporary AMT relief.  The Baucus bill achieves deficit-neutrality–even likely over the second ten years according to CBO–largely due to what the proposal assumes would happen to Medicare payments to providers over time.  As CBO explains (on page 9 of their letter, emphasis added):

These projections assume that the proposals are enacted and remain unchanged throughout the next two decades, which is often not the case for major legislation. For example, the sustainable growth rate (SGR) mechanism governing Medicare’s payments to physicians has frequently been modified (either through legislation or administrative action) to avoid reductions in those payments. The projected savings for the Chairman’s proposal reflect the cumulative impact of a number of specifications that would constrain payment rates for providers of Medicare services. In particular, the proposal would increase payment rates for physicians’ services for 2010, but those rates would be reduced by about 25 percent for 2011 and then remain at current-law levels (that is, as specified under the SGR) for subsequent years. Under the proposal, increases in payment rates for many other providers would be held below the rate of inflation (in expectation of ongoing productivity improvements in the delivery of health care). The projected savings for the proposal also assume that the Medicare Commission is relatively effective in reducing costs—beyond the reductions that would be achieved by other aspects of the proposal—to meet the targets specified in the legislation.

Of course, even though I say the Baucus proposal contains a lot of “bipartisan” elements, the fact is that it doesn’t have bipartisan support–not presently at least.  In fact, even the Democrats aren’t all that crazy about it; it’s not just that the Republicans won’t buy it.  And that’s all the more reason that I worry that the same thing that happened with the Bush tax cuts will happen to this health reform bill:  to win the support of more members of Congress you have to keep adding more costly elements to the proposal (–the mentality is: “if you get what you want, then I get what I want” rather than “I’ll give up this part if you give up that part”).  And if a bill eventually passes that hands out a lot of gain and very little pain, then even those who originally opposed the bill for its unaffordability might have a hard time voting against its extensions later on.  Don’t you think so?

UPDATE Friday morning:  Just check out this story in today’s Washington Post (by Shailagh Murray and Lori Montgomery) to get a strong hint at what I mean.  The only “bipartisanship” seems to be in complaints that the Baucus bill has too much “pain” and not enough “gain”:

Democrats and Republicans alike worry that a bill intended to address one source of financial hardship — the skyrocketing cost of health care — could lead to another, in the form of hefty premiums…

Some Senate Democrats, along with a key moderate Republican, Sen. Olympia J. Snowe (Maine), are now discussing ways to increase assistance for individuals and families who could face premium costs of up to $15,000 per year by 2016. Sen. Charles E. Grassley (Iowa), the ranking Republican on Baucus’s committee, is suggesting government assistance to insurance companies to help them control premium costs. And lawmakers in both parties are questioning whether Baucus’s main revenue source, an excise tax on insurance companies for their most generous insurance policies, would simply be passed on to consumers…

Kind of reminds me of how climate change policy’s going, too.  Folks are always in favor of the desired outcome of the policy (making things better) as long as you can get there without actually having to ingest the active ingredient (bitter medicine?) in the policy.  If we can reduce global warming without raising energy costs, better control health care spending without reducing the subsidies to health insurance, improve our fiscal outlook without raising any taxes or cutting any non-wasteful spending…it’s all pretty much the same story (a fantasy).

18 Responses to “How the Baucus Proposal Reminds Me of the Bush Tax Cuts”

  1. comment number 1 by: Underwriterguy

    Of course the taxes on insurers will be embedded in future premiums; who thought otherwise. Today state premium taxes are a specific line item in the rates charged to large employers.
    And politicians have suddenly discovered that the excise tax on “rich” benefits may apply to union plans, retiree benefits and wait til someone prices out FEHBP for NYC residents! Too bad there is not the political courage to tax all employer paid premiums as compensation.

  2. comment number 2 by: rl love

    I could not agree more with your take on the state of our affairs.
    Sounds as if you are busy but if you have the time I have an honest question:
    In the CBO’s accounting of health-care costs, do they consider the loss of purchasing power of those who are to be required to purchase health insurance. If GDP is not affected does that satisfy the requirements of an honest appraisal. Or where, in other words, is the ramification line drawn, generally?

  3. comment number 3 by: rl love

    There is a short article rearding
    Organized Labor’s position on the Baucus bill:

  4. comment number 4 by: Jim Glass

    Now we have an answer to the earlier…

    But Jim, regarding this comment of Keith Hennessey you quote: “it’s a transparent gimmick designed to try to get CBO to say the bills don’t increase the long-term budget deficit”…How exactly would the “gimmick” get CBO to say the bill doesn’t increase the deficit if it in fact does? CBO isn’t exactly a lackey for the Administration, and they don’t get fooled by “gimmicks.”

    [Me ...]

    … this sure sounds an awful lot like the Sustainable Growth Rate (SGR) mechanism in Medicare today that, when spending rises too fast, is supposed to cut Medicare reimbursement rates for physicians to control cost.

    Since enacted, in every year from 2003 to 2009 the SGR’s rules have said such a physician reimbursement cut should take place and the board running it set one — and every single time Congress has intervened to block the cut, or to increase reimburesments instead. That’s a pretty toothless mechanism!

    From my reading above, it seems like Obama is planning to do the same thing all over again. Hennessey may have been thinking of a scenario like this:

    1) Congress passes a plan, saying it will be revenue neutral.

    2) CBO instead scores it as increasing the deficit by $X.

    3) But Congress inserts a provision saying, “In the unlikely event that the plan in fact increases the deficit by $X, a board will then act to reduce Medicare physician reimbursements by $X. Thus the plan remains revenue neutral.”

    4) CBO then says …

    4a) “Yup, that makes the plan revenue neutral by the plain reading of its terms”; …or…

    4b) “You’re kidding right? Congress then will in no way be bound by a board’s action any more than it is now via the SGR, and when was the last time it followed the SGR rules to cut Medicare physician reimburesements?”

    The way I read things, yes, the Baucus plans works pretty much like the above, and CBO has responded half-way between 4a and 4b:

    “Yup, that makes the plan revenue neutral by the plain reading of its terms, but we might remember that such cost-containment terms have been less than fully effective in the past”.

    Moreover, it’s revenue neutral over 10 years as calculated on the basis of its cost of operating only over the last five, meaning on an annual cost basis it is a budget buster in year 10 and rising. Even the Bushies would be embarrassed by accounting like that.

    Looks to me like Hennessey was on the mark.

  5. comment number 5 by: Jim Glass

    “It expands health insurance coverage (a crucial feature for the Ds) but offsets some of the gross cost of expansion with a revenue increase (excise tax on high-end policies) that removes some of the distortion caused by the current tax exclusion of employer-provided health care”

    Removes some of the distortion? I sure don’t see that — have you read how that tax is supposed to work? It’s one moth^h^h^h … er, very complicated thing, people are already pointing out its unintended side effects, such as penalizing companies for hiring low-income workers(!).

    It only adds a new layer of distortion on top of the existing layer of distortion, looks to me.

    Alas, this shows just how politics works. The first layer of big fat distortion, the tax subsidy for health benefits, is “owned” by interest groups — especially powerful Democratic interest groups: the unions with gold-plated benefit plans, and the health worker unions that get more employment through expensive mandated benefits.

    And since politicians can never get rid of a distortion that’s owned by somebody, they can only try to “counter” it by adding another layer of regulation on top. Now think for a moment of the “law of unintended consequences” and all the very bad unforeseen costs and adverse effects that have resulted from the first layer of regulation — what should we expect from the new layer added on top?

    Much simpler and more effective, it would seem, would be to just get rid of the first distortion — the tax subsidy for benefits — and then use the savings for a constructive purpose …say for paying the cost of covering the uninsured. Win-Win!

    This proposal in fact was put before this very same Senator Baucus earlier this year in bipartisan testimony, as David Brooks reported

    There was a long table of 13 experts, and a vast majority agreed that ending the tax exemption on employer-provided health benefits should be part of a reform package.

    They gave the reasons that experts — on right or left — always give for supporting this idea. The exemption is a giant subsidy to the affluent. It drives up health care costs by encouraging luxurious plans and by separating people from the consequences of their decisions. Furthermore, repealing the exemption could raise hundreds of billions of dollars, which could be used to expand coverage to the uninsured.

    The Finance Committee’s chairman, Senator Max Baucus, looked exasperated. With that haughty and peremptory manner that they teach in Committee Chairman School, he told [Sen.] Wyden and the world that this idea was not going to happen….

    “Exasperated”. The politician’s response when good, bipartisan policy meets politics. To have faith that this process will produce something for the better requires … optimism, it seems to me.

    The best brief description of the whole reform that I’ve seen came from Brooks:

    Rather than actually “reform” anything, Obama and the Dems are trying to keep the whole current system in place to please its “owners” — the unions keep theirs, deals so far with Big Phama and the AMA let them keep theirs, nothing will force *you* to give up your current coverage, the state cartels stay in place (insurance competition still blocked at the border), add the employer tie staying in place, and the “reform” preserves all the WORST parts of the status quo.

    Then it adds coverage for 30 million more people … and somehow by magikal incantation this *reduces government costs* without reducing services, for the long run at least (another reason why we must do it!)— as guaranteed by a trigger that will reduce Medicare physician payments if costs aren’t cut. The same trigger that already exists, and which Congress has repeatedly over-turned to increase Medicare payments instead for a decade.

    You know, the more I learn about the details of this plan the less I like it.

    The same goes for some others. Apparently Baucus’s proposal wasn’t sufficiently protective of the unions — the coal workers union through Sen. Jay Rockefeller took a serious shot at it even before it was announced:

    Dem Senator Warns of ‘Big, Big Tax’ on Middle Class in Baucus Bill…

  6. comment number 6 by: Anandakos

    I’m back,I’m fed up with all the self-serving “economics” justifications for greed, and I’ll say it out loud. We need Reagan era tax rates: 70% for the trust fund slackers, the bankster “quants”, and the football forons.

    We also need an estate tax of 100% over 10 million dollars (yes, indexed). Let ‘em keep everything up to that level and nothing beyond. Nobody in the second or following generations needs more than 10 million dollars. If they invest $10 million of today’s dollars they can afford a couple of homes and a nice yacht on the proceeds. Daddy (or increasingly, Mommy) has certainly made sure they went to Harvard, Vassar, or Yale and that they’re all Executive VP’s of some staff function in the family scam — disculpe me, “company” — so they have a nice cash flow income in addition to the $10 million (divided by however many kids). They’re on the board, too, so nobody can fire them.

    Has there ever been a son or daughter of a brilliant entrepreneur who invented something that really changed the lives of all Americans who had the same brilliance? The short and complete answer is “NO!”

    Look at William Vanderbilt for an excellent example: the Commodore (Cornelius) was a great railroad builder and operator. Little Billy was just a great railroad monopolist. (For the historians among you it was Billy, not The Commodore, who said “The public be damned”. And just FYI here’s a little quote from the press of the day: “The man of whom his own father, “the old Commodore,” once said, “William always was a fool,” has been interviewed in Chicago.”

    Now obviously a sample of one is not a true statistical test. But how about the Rockefellers? John D. was a monopolist through and through, but he sure did love to build refineries. But what about the kids? Well, they certainly were first rate philanthropists and that’s a socially beneficial trait, but none of them ran The Standard Oil Company (of any state) or Mobil. Daddy was the only one who liked the black goo. The kids were too refined (that’s a pun!). So if John D. had had to sacrifice his squintillions, what would have been the loss?

    Well, the worst would be that Jay Rockefeller would probably not be Senator from West Virginia today and rattling Max’s cage.

    Next worst would be that Diego Rivera wouldn’t have been able to paint Karl Marx into the murals of Rockefeller Center.

    But best of all would be that NBC wouldn’t have that stupid window on 34th Street.

  7. comment number 7 by: rl love

    So, Anadakos, does that mean you are not satisfied with a 35% tax on the health-care plans “for the trust fund slackers, the bankster “quants”, and the football forons”?

  8. comment number 8 by: rl love

    Sorry about the “N”. Anandakos.

  9. comment number 9 by: rl love

    Had I known that the following comment was to be in the #2 slot (I thought it was to be #1) I would have presented it thusly:
    I could not agree more with your take on the state of our affairs.
    Sounds as if you are busy but if you have the time I have an honest question:
    In the CBO’s accounting of health-care costs, do they consider the loss of purchasing power of those who are to be required to purchase health insurance? If GDP is not affected does that satisfy the requirements of an honest accounting? Or where, in other words, is the ramification line drawn, generally?

  10. comment number 10 by: Anandakos

    R L Love,

    I’m don’t like targeted taxes; they distort behavior. I want a graduated income tax with a maximum rate of 70% on all income from whatever source for people with an income over $5 million dollars. State taxes should be dollar for dollar creditable. We an discuss the size of the intervening steps.

    That would certainly ensure that we wouldn’t need to tax health care plans, although I’m not opposed to the general idea of making people think about the underlying cost.

    And if you’re about to say “well a 70% rate would distort behavior!” I’d say, “probably not”. In actual fact there was more individual innovation in America when individual tax rates were at nosebleed levels. Hewlett and Packard built their test gear, the Xerox process was invented, personal computers were developed all under the 70% maximum tax rate that pertained at the beginning of RR’s presidency.

    Real inventors don’t give a tinker’s damn about tax rates: they’ve got the inventive itch and they will scratch it.

    The truth is few genuine inventors make very much from their inventions these days. Some corporation orders its in-house “inventors” to make the minimal changes necessary to avoid a patent suit and drives the real idea to the wall.

    The people who make 70% are the banksters, hedge fund “quants”, entertainers, and professional sports players. What are the entertainers and athletes going to do other than play or make movies? Yes, they have unique talent and they divert large numbers of people from thinking about the crappy deal corporate America gives them. To that degree they do provide a social good. So let ‘em keep 30 percent of their twenty or thirty million a year.

    Given the advent of computers, maybe the banksters and quants will decamp to Bermuda or Guernsey. Given that most of their “investment” these days is in third-level derivatives leveraged with money borrowed from retirement vehicles, what social benefit do they actually bring. Local and regional banks are what funds the real economy, not these forons.

    So, don’t let the door hit you on the ass on the way out. And by the way, don’t bother to come for a visit, either.

  11. comment number 11 by: Anandakos

    R L Love,

    Sorry, I wasn’t meaning “you, R L Love” in the final paragraph. I was meaning the hedgies and banksters.

  12. comment number 12 by: SteveinCH


    What you describe doesn’t even come close to solving the problem. First, in any progressive tax structure, all (and I do mean all) of the moeny to be captured is well short of the $5 million mark. I assume your 70% rate is marginal not average so you are talking 70% of the amount over $5 million. That would hardly make a dint our our current revenue problems. I’ll pull the CBO data if you don’t believe me but all of your railing against bankers and quants won’t change that fact.

    Second, if they find a way to make a lot of money, what’s wrong with that? Do you really want to put government in the role of deciding that some ways of making lots of money are good and others are bad?

    As to your point on innovation, I agree to a point. Inventors probably, by and large, don’t care about tax rates; but commercializers care about them quite a lot, although, to be fair, they will care more about the corporate tax rate than the individual rate.

    Fascinating the way you frame the debate, assuming you are not just trolling. “So let ‘em keep 30 percent of theirtwenty or thirty million a year.” Let them keep it, as if we the people have a claim on it to begin with.

    I’m sorry you are so angry about other people making money. I don’t have a lot of time for some of the ways that people make money but I’m not in a position to judge how much they should make, and in my opinion, neither is the government.

  13. comment number 13 by: Anandakos


    Sorry I took a while to reply. I was composing yesterday when I accidentally hit the “shutdown” key on a new keyboard and Firefox went away!

    I don’t have a problem with adjusting the rates below $5 million. Whatever it takes to get to about 23% of GDP which seems to be what people want and the economy demands at this time. We might be able to dial that back after the private economy recovers. And yes, I do mean marginal of course. Going from $499,999 to $500,000 would not mean that all income back to dollar one would get a higher rate. Basically the same process as today.

    Also, as Diane has suggested, I’d turn most deductions into refundable credits so they’d have the same dollar impact for low earners as they do for high earners. They’d have much more economic impact that way.

    To your second point, I do think that many people making scads of money are getting it from sources that are essentially immoral. Athletes participate in what is the closest thing we have to a pure meritocracy — except perhaps cosmology and theoretical mathematics which have very low capital costs. So of my list of “disfavored” roles, I’d say they have the most legitimate claim to keep their income. They entertain and divert many people, and Alex Rodriguez’ kids will have to make it to the Bigs on their own talent, if he has any who love baseball. Still, in a less atavistic society where teams were not arms of media corporations, they’d be compensated generously but not opulently.

    The Babe made $80K in 1930 and 1931. Given the depreciation of the dollar by about 97% since those days, that would be somewhere between 2.4 and 3 million dollars in today’s money. Is A-Rod worth ten times what Babe Ruth was? Only to a mogul, not to the fans who can’t get into “The House That Crushed Ruth’s”.

    I’d give you the point that the “quants” certainly have huge mathematical talent; they’ve got excellent brains. BUT …. instead of cosmology or theoretical math research they’re putting those huge brains at work developing third-level derivatives piled on second level debt teetering on Joe Schmoe’s job at the auto plant. Which they’re trying to destroy by outsourcing it to Asia or Mexico to drive up the price on some other security.

    They give nothing to society. Middling in financial instruments does not produce wealth: it produces money. With these guys beavering away with their black-box derivatives, the Fed doesn’t have to worry about deflation, even in a monster recession like this one.

    Increasingly the entertainment industry is peopled by the kids of the stars and singers of the last generation. Do you think that a radical talent like Marlon Brando or James Dean — or even the Harrison Ford of American Graffiti could break into movies these days? The last person even remotely as rebellious and mold-breaking was Sean Penn, who came up about twenty years ago.

    America has become a class-encrusted oligarchy of entrenched power and it needs to be broken.

  14. comment number 14 by: SteveinCH


    I’d love to see a referrendum on your 23% number. It’s hard for me to imagine how to argue that the Federal government should receive almost a quarter of the nation’s entire output, without reference to state and local governments and what they take but perhaps that is a subject for another day.

    On the subject of taxes, the key is how much progressivity you would like to engineer into the system. Should people earning 20 percent of the nation’s income pay 20, 30, 40 or more percent of the total tax burden. You don’t take a point of view on this but it is the core question.

    You are certainly entitled to your point of view on what does and does not create wealth for society. For my own benefit, I am comfortable letting the market set wages. While I struggle in a number of cases (not all among the highest paid) to justify the numbers to myself, I don’t believe it is right for me (or for the government) to determine what jobs are more valuable than others. You clearly feel it within your purview and our more substantive disagreement is over how you will make the judgement and whether you want to cede that judgment to the government as opposed to which jobs are more valuable than others. To betray my bias however, I’d argue that in general people who pass money from Peter to Paul or vice versa create no wealth, meaning a good chunk of what government does inherently does not create wealth despite the billions we spend doing it.

    To go back to the tax issue for a moment, I’d propose the following: to the degree we all share in government largesse, let the top 20% of income earned pay 30 percent of the taxes, the next 60% pay 60% and the last 20% pay 10%. I can’t imagine judging on the basis of who employs you or what your job is. In fact, that would probably be thrown out as a bill of attainder if you tried to do it.

    I enjoyed your thought on Ruth vs A-Rod and agree with it directionally. However, you need to realize that when Ruth played, there was no TV (not even radio when he started) and no merchandise rights. These, for many teams are easily half the gross so I would expect top players to be paid more (inflation adjusted) today than they were then. One of the consequences of a society with wealth is that luxuries (and baseball is one) tend to inflate faster than the general economy.

  15. comment number 15 by: Anandakos


    I said nothing about choosing specific jobs for punitive taxes. I simply want people who make more than $5 million in one year from all sources taxed without differential favor to pay 70% of it to the government. That was my proposal.

    Now I would be happy to give tax credit for “new saving” (essentially the difference between money taken in and money spent; sort of a consumption tax, but graduated), but the tax preference should be given only once in the year the investment or saving is made and not over and over for the income stream generated by the it. To qualify as “new saving” the received funds would have to be placed in some sort of vehicle which the investor did not control. No gaming the system by buying a new Hummer every year.

    So far as the specific occupations I talked about, I was just pointing out that the majority of people who make more than $5 million/year fall into the four categories I mentioned. I was merely using them for illustration.

    Without more research I wouldn’t immediately agree to the level of progessivity in your proposal, but I do think you’re close, in that less than 3% of taxpayers garner the top 20% of the income while nearly half provide the bottom 20%. Your profile is similar to the Federal profile today.

    And maybe being dogmatic about a 70% maximum rate is too extreme. Perhaps 50 or even 45% would yield the proportion you envision. But it needs to rise, and deductions need to be sunsetted by replacement with refundable credits.

  16. comment number 16 by: SteveinCH

    My approach I guess would be simpler. Just take the total government take and mulitply by 1.5 for the first group, 1 for the second and .5 for the first. Eliminate all deductions (or refundable credits) and you’re done. In terms of rates, it depends on how much of the total of government you want individuals to pay.

    Under almost any circumstances, we wouldn’t get anywhere close to the 50 percent rates, much less 70. The reason why is that currently, the bottom 50 percent of the income distribution only pays FICA and medicare taxes net which (based on employee contribution) net to much less than even 10 percent (I think 7.5) last time I checked.

    I’ll run some numbers on it later to get more specific but my general point is almost any distribution of spending that starts with principles about how the burden should be shared (as opposed to how the government should redistribute income independent of the burden) is going to likely result in higher taxes at the lower end of the spectrum and lower at the higher. This is because the income tax system is already sharply progressive (although not as sharply as you would prefer at the highest levels). My point to you is your desire to tax people about $5 million income at 70 or 50 percent is simply punitive. It’s not about funding the government, instead it’s a value judgment you have made that they do not deserve that money.

    You are of course free to make value judgments in that way but I prefer not to cede that power to the government. I don’t trust it enough to do that. Sadly, we don’t have a lot of potential philosopher kings in Washington and haven’t for as long as I can remember.

  17. comment number 17 by: SteveinCH

    oops, meant third after .5 in the first sentence

  18. comment number 18 by: AMTbuff

    Anandakos, your proposal is not as large a tax increase as you think. In California, families making under $200k already face marginal rates exceeding 50% when you count state taxes (almost 10%) plus federal AMT (32.5% to 35%, with no marginal benefit for those state income taxes), plus federal phase-outs for the education credit (12.5%). That makes 55% or more, and I didn’t include the IRA phase-out which hits you with the double whammy of the loss of a deduction and increase in AGI, triggering all the other phase-outs. I also omitted the stimulus phase-outs, which bumped marginal rates by 4% to 5% in recent years.

    Marginal rates are already far above the “sticker price” rates of 25% which apply to the taxpayers I just described. I know what you’re thinking: let’s raise marginal rates and repeal all the phase-outs. Guess what: That won’t raise nearly enough revenue because those people are ALREADY paying very high rates. The public has no idea how high their actual marginal rates are.*

    If the statutory rates climb to 70% and phase-outs continue to be de riguer, actual marginal rates will probably top 100%.

    *To compute your marginal rate, just pull up your tax software for your last income tax return. Write down your state and federal bottom line tax due/refund. Add $1000 to your income and repeat. Total your increased taxes and divide by 10 to get your percentage marginal tax bracket. I can practically guarantee you it is larger than you thought it was.