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An Illustration of Why I Don’t Like Progressive Taxation
By JLP | August 22, 2008
Check this out.
Using 2008′s Federal Income Tax Brackets for Married Filing Jointly, I ran some numbers comparing the tax burdens for two incomes. First, here’s a look at the 2008 Federal Income Tax Brackets for Married Filing Jointly:
Using those numbers, I ran the numbers for two different taxpayers. One taxpayer (Joe) has a taxable income of $50,000 and the other (Pete) $500,000. Here’s what their tax burden looks like:
So, Pete makes 10 times more than Joe but pays nearly 22 times more in taxes.
I have a hard time understanding what Obama means when he says it’s time for people with higher incomes to start paying their fair share in taxes.
Oh, and I didn’t even mention the AMT, which I think would most likely would affect someone with a taxable income of $500,000, making their tax burden even higher. I could be wrong about that as I’m not exactly sure how the AMT works.
Topics: Taxes | 60 Comments »
August 22nd, 2008 at 10:34 am
JLP – Amen brother. Plus if you drop the income numbers down further, they are not paying any taxes. Shouldn’t everyone have to pay at least something to support the services they receive? $1.00 even? I think so.
August 22nd, 2008 at 10:39 am
I completely agree. To me paying a “fair” share of taxes means everyone pays the same percentage of their income.
August 22nd, 2008 at 10:46 am
I think where the real difference comes in is the income that people started with. It would be interesting to see what the expected starting income would be. That always seems to be where a lot of differences are.
August 22nd, 2008 at 10:52 am
triple-e wrote:
“It would be interesting to see what the expected starting income would be.”
I agree but that would really complicate the illustration.
August 22nd, 2008 at 10:53 am
I hate taxes.
And they are only going to get worse. 
August 22nd, 2008 at 10:59 am
Ummm… People making 50K a year cannot take care of the basic needs if they were paying 30 percent in taxes. that would cause a huge problem with standard of living issues, and the government would probably end up subsidizing things anyway. If the person making 500 K a year were only paying 15 percent taxes a year than this country would have no tax revinue. I don’t think people realize that we are 10 trillion dollars in Debt! Our government spends more than it brings in, so do not anticipate any tax cuts anytime soon. Also remember that we are experience some of the lowest taxes in 60 + years. Stop your bitching… what is a person with 500K a year complaining about. I don’t care how hard he worked to get it! You also did not figure in social security… huge flaw in your math!! Take into account the amount of SS that people who are self employed have to pay also( 15%)
August 22nd, 2008 at 11:04 am
You forgot payroll taxes. That makes it:
Joe tax: $6698 + $3825 = $10523
Pete tax: $146574 + $13574 = $160148
That’s only 16x more, vs. earning 10x more. Much less of a difference.
And hey, maybe since Pete is so wealthy, $250k of his $500k comes from capital gains or qualified dividends (many jobs that pay that much will do so at least in part with stock). Then his tax is $108677, or about 10x more.
If you actually look at the taxes paid, the current system results in something like a flat tax (the top 80% of taxpayers pay ~20-25% of their total income) because of payroll taxes and because richer people gain much more income from qualified dividends and capital gains.
And I didn’t even include sales tax. If you earn $50k it’s likely you are spending most of your after tax income. But the guy earning $500k is probably saving much more of it. So sales taxes will also raise taxes for poorer people vis-a-vis richer people. The same is true of taxes on gasoline, alcohol, cigarettes, etc. since poorer people buy more of these goods as a share of income.
The fact is that our current system isn’t even progressive. So if you want to complain about progressive taxation that’s fine, but the current US system isn’t at all a good example.
August 22nd, 2008 at 11:07 am
Emily,
I didn’t leave out Social Security. My focus was Federal Income Tax, not Social Security. Therefore, my analysis isn’t flawed.
We could equalize the tax system if we really wanted to. It’s just easier to get votes if you turn it into a class warfare discussion.
August 22nd, 2008 at 11:11 am
I would also like to point out that I doubt there are very many people who’s total income is 500K+ who have only earned income as their source of funds.
For instance, take this chart:
http://www.visualizingeconomics.com/2008/04/06/top-400-taxpayers-sources-of-income-1992-2005/
The top 400 people make more than 50% of their money from capital gains. So why not do the same chart but include 50% of his income from his salary, 30% from capital gains, and 20% from dividends and see how much his tax bill comes out to?
I’d also like to note, I bet you wouldn’t be making this comparison of you made 50K or less and were supporting a spouse/family.
August 22nd, 2008 at 11:29 am
I think Obama means that if you are making more money you can afford to pay more in taxes. I don’t resent paying taxes and don’t understand people that do. There is a huge deficit that’s accumulated during the Bush administration to pay off, along with a hugely underfunded education system. I think we should spend more money for education & training for all children so that they can grow up to have good jobs, so they they can in turn pay lots of taxes themselves!
Jean
August 22nd, 2008 at 11:37 am
AMT will not exceed the tax rate with a standard deduction. Its max rate is 28%.
AMT only impacts you if you have very high deductions through things like home deduction or high state taxes, etc. Max AMT rate is 28% where as max marginal rate is 35%.
Check out the graph comparing AMT effective rate to normal tax effective rates on the Wikipedia page:
http://en.wikipedia.org/wiki/Alternative_Minimum_Tax
Jim
August 22nd, 2008 at 11:49 am
It’s just boiler plate class warfare crap. Blame all the problems on the “greedy” rich. If he makes the rich pay “their fair share” he can use the money to buy 10 million more votes. On his web site (http://www.barackobama.com/issues/economy/#tax-relief) he says he wants to “completely eliminate income taxes for 10 million (more) Americans.” At the rate this country is going, it won’t be too long before “taxpayers” not paying any taxes will outnumber actual taxpayers who do pay taxes.
Ken
August 22nd, 2008 at 11:57 am
I don’t understand why everyone thinks that if you make over a couple hundred thousand dollars you all of a sudden have all this capital gains and dividend income flowing in every year. Many people do in fact make a straight salary that can get very large and is subject to normal income taxes. On that we pay way more than our fair share as JLP has pointed out. Capital gains and dividends might become more important as you take money out of the market at older ages, but remember that this money helps fuel production in our country so the government provides an incentive for investment. People argue that there are too many loopholes for the rich, well then go with a flat tax with no deductions. The rich will pay more because they make more, but it won’t be some arbitrarily higher percentage that the masses deem as “fair”.
August 22nd, 2008 at 12:01 pm
If Pete is bitching about paying taxes on $500,000 he can switch places with me anyday!
If you haven’t figured it out life isn’t “fair”. Some of us are raised in loving 2 parent families who live in safe neighborhoods, have the opportunity to attend good schools, have good healthcare and have the financial ability to go to college.
For others that framework for success isn’t as easy. They may live in extreme poverty, go to a crappy school, have one parent who work 2-3 jobs and are not around to provide the guidance they should. They may have parents who have chemical addictions, depression or a host of other obstacles that make their life hell. Now amazingly some of these people reach financial success, but many do not.
My point is that you cannot expect people from two different backgrounds and abilities to have the same chance of success. If we all started in roughly the same place it would make for nice comparisons, but we don’t.
For some they have done the best they can do with what the circumstances they were given, but still find it hard to make ends meet.
August 22nd, 2008 at 12:01 pm
And Abby, why should you pay more just because you can? I can pay more for gas than someone that makes less, but they don’t make me show my W-2 before they decide how much to charge for a gallon of gas. Do you think that would be “fair”? The so-called “rich” already pay way more in taxes. The top 1% pay 40%, the top 10% pay 70%. I would say that is paying more! I don’t resent paying taxes, I just resent paying a disproportionate amount to accomplish wealth redistribution.
August 22nd, 2008 at 12:12 pm
Mickey,
I understand that life isn’t fair but that doesn’t mean we have to make it purposely unfair. I see nothing unfair about making Pete pay $50,000 in taxes or the same percentage as Joe.
Yes, life is unfair. But that’s a silly argument for forcing those with higher incomes to pay more in taxes.
August 22nd, 2008 at 12:28 pm
The comment from Traciatim is spot on. I’m an accountant that specializes in tax compliance and consulting for high net worth individuals. Out of my client load of 15 or so families, only one actaully receives a W-2. And even most of his income is from capital gains from stock options he receives through his employment.
Many of the examples given are just too simplified, because they do not take into consideration the lower investment tax rates or deductions to get to the the bottom line of what makes up taxable income.
For the record AMT rates are 26% and 28%, but again the method of arriving at taxable income is not the same.
I’ve found it interesting over the past couple months to note that not a single one of my clients is estimating lower income for 2008 than 2007 even with the current downturn in the market.
I can assure you that even as a college educated professional in a well paying job, a person who has made all the “right” choices, my lifestyle and earnings will never even approach that of my clients. The rich are doing fine. You don’t need to worry about them. And for that matter so are people like me who are the emerging upper middle class who budget, live within their means, and don’t have to live paycheck to paycheck after a couple of years working.
I can understand wanting people to work for their money and not letting people off with the victim excuse. But it does sadden me that so many of the commentors have little compassion and in some cases even disdain and anger toward the poor and lower middle class. We all have choices to make in life, but you can’t deny the middle and especially the upper class start out on a better playing field. The least we can do is recognize this and not feel so much hatred toward people who are in worse sitiations than ourselves.
Progessive taxation helps out people who truely come from circumstances that odds are will never allow them to excel finacially. It is also beneficial for the middle class – your teachers, fire and police forces, etc., who make under $100K and don’t get double digit raises, bonuses and ROI.
August 22nd, 2008 at 1:08 pm
Government has been such an easy target for us to blame and besides, who wants to pay more taxes?! The unfortunate reality is that we, as the people, have elected irresponsible leaders to governed us and those same leaders also like to direct us against the government. What we don’t ever think about is that the gov’t creates the environment for the rest of us to thrive on. Where did those no-bid contracts to rebuild Iraq go to? Certainly not to that fat-cat drunk veteran standing at the street corner begging for money so he can buy the net hit.
In order for us to sustain a decent living standard for those hard working folks but don’t seem quite make it… From what I gathered of Obama’s economic policy, he’s not stopping you from making money. Instead, his tax policy is such that if you make below the income for a minimum living standard, then you don’t have to pay taxes. Sure, it’s not fair to those making over $250k per year to bear the tax burden, but do you think those families making under that cap can afford to fly their private jet to their summer homes or send their kids to prestigious private universities because they know some alumni who can put in a good word to the admission committee?!
Sure, I don’t think the gov’t should be involved in the redistribution of wealth. But the reality is that the gov’t has been knees-deep in this due to their socio-econo-political policies… Look at no-bid contracts for Deepwater, re-writing of legislation so that energy companies can profiteer from black market trading, subsidizing companies within the military-industrial complex,… the list goes on.
If you don’t think the system is fair, go make less money, no one is stopping you. We don’t ever hear the same “fairness” argument when gov’t take our tax money to facilitate the rich getting richer. If there’s little to no regulation on businesses, as what has happened since Reagan, we are heading back to the wonderful days of the 1920-30′s. Without the intervention of gov’t, you would not be standing on your tower of cash to cry how unfair and unjust this dysregulated capital system really is.
August 22nd, 2008 at 1:46 pm
As another poster mentioned, life isn’t fair… and civilization is a veneer. From a purely mathematical perspective, sure, a flat tax is fairer, everyone paying 25% of their income. However, if this requires the poor people working 60 hours a week at minimum wage jobs to sacrifice any hope of college for their children, while a rich person who inherited enough wealth that he never has to work a day in his life is reduced to owning only 18 luxury cars instead of 20, the poor people will not see that as fair.
Likewise, even if it is a simple function of supply and demand which is driving CEO salaries into such astronomical multiples, the average worker who is replaced by someone from India will not consider it fair that the CEO who makes $5 million dollars a year eliminated his job to save the shareholders $10,000 a year.
And ultimately, that’s why the rich pay higher taxes, and hire private security, and buy more expensive homes in private enclaves, because it’s a form of insurance against the have nots (who have access to guns) from getting so fed up that a revolution occurs. You have to dangle that brass ring just low enough that it looks to be within reach if you want them to play the game…
So, with that in mind, right now America has a problem with the deficit, and it will require spending cuts or more taxes to solve it. If you cut services to the poor, you run the risk of pushing them over the edge. Likewise if you increase their taxes when the mood is doom and gloom and unemployment is rising. There is little point in cutting services to the rich, and neither candidate looks interested in shrinking the government’s mandate anyway. That just leaves taxing the rich, or running a deficit forever.
The problem with running a deficit forever is that interest payments will continue to rise, compounding the problem… according to one source that I have no idea if it’s reliable or not, 10% of the budget right now, 273 billion dollars, is interest. If you got rid of the debt, that would eliminate the interest payments, which would allow everyone to have a 10% tax reduction in perpetuity. Considering how much the rich pay in taxes, that’s an incredibly large amount that compounds over time.
So really, if the options are to keep running deficits, which will increase interest payments and budget deficits, which will guarantee down the road that the rich pay more taxes (as soon as other countries stop buying your debt) anyway with no benefit, or for the rich to pay more taxes now, and then reap incredible future benefits, I really find it hard to believe that the rich would refuse. I think the problem has always been that the increased taxes are never met with balance budget and tax reduction plans, just the increases, which is why the rich are so tired of it. I think what all of the “well off” crew that might be facing tax increases from Obama should be doing is getting that word out that any increased taxes should only be implemented if laws are put in place that require balanced budgets, require any surpluses to go against the debt, and require any savings in interest payments to require tax reductions equal to the savings. If you guys had that, I bet in 10 years the net worth of every “rich” person in America would be higher in inflation-adjusted dollars even with the higher taxes than it would have been if nothing is done.
August 22nd, 2008 at 1:55 pm
I’m not angry at poor people in general. What I am angry at is when they just complain, don’t make an attempt to do anything about it, and want the government (read: YOU and ME) to take care of them. I’m sorry, but that is crap.
I’ve been there. I grew up poor. Our family struggled for everything. Reality hit me one day when I was working for minimum wage and my boss didn’t want to give me a $0.05 per hour raise. Did I complain? Heck no. Did I ask for a government handout? Heck no. I quit that job in the next month, found another that would work around my schedule, and enrolled in college. Yes, it was tough going to school and working. Yes it was hard doing without (phone, cable, you name it) while your friends had everything. Yes it sucked to drive a crappy car with holes in the floor boards. It sucked and it sucked hard.
But you know what? It was a sacrifice that had to be made and if I had to do it all over again I would. My salary now is approaching six figures. My wife stays at home with our two kids. We live in a nice house and a nice neighborhood. Should I be punished for that? No I should not. Should the guy across town making $500,000 per year be punished for his success? HECK NO!
Should the person on the other side of town be punished for making $10,000 per year? No, but HARDSHIP IS NOT A PUNISHMENT. Hardship builds character. Hardship is also a great motivator. If we make things easy on people, what motivation to they have to better themselves? Why go try to educate yourself when you’ve got a nice car, a cell phone, and everyone else buying your food and subsidizing your housing?
So no, I’m not angry at the poor. I’m angry that they don’t want to endure the hardship to do anything about their situation. So a crappy situation may get worse–you know what? If you are working toward a goal of positive improvement you can do so knowing the crappy situation is only temporary.
August 22nd, 2008 at 2:13 pm
Chloe, thanks for the post. It was the first one I read that rings true to me.
August 22nd, 2008 at 2:34 pm
Angry Rick,
Hey I feel your frustration, so you have worked hard to reach your version of the American Dream. What you have done is admirable, and the question I have for you is, do you think you are the norm or the exception, with respect to how hard you work vs. how much you earn?
If you are the exception and not the norm, then there are more people out there working hard and slaving away, but they are not earning as much as you.
I hate to pop your dream bubble, I don’t think making a 6-figure income for a family of 4 would classify you as rich. If you feel you are paying too much tax and being penalized, perhaps you are not taking the full advantage of the tax system. Have you asked yourself… is your salary only 9% of your AGI? If it isn’t, perhaps you need to work even harder to be like that top 400 tax payers, because you ain’t living the American Dream among the elites.
There’s no point to kick down when you are that far down the bottom! My friends, as McCain would say, look up and keep working.
August 22nd, 2008 at 2:57 pm
Chloe’s comment is interesting, but remember that people making $250k (which seems to be where Obama draws the line for “rich” in regards to social security) are not the people that Chloe is helping dodge taxes. I think that most people can’t imagine how someone who makes a couple hundred grand can not feel rich, but you really don’t. Yeah you are not struggling, but you often have debt that includes student loans and more than likely live in a urban area with a high COL. So many people like to think that there is this huge group of people just jet setting around the world, when in fact most of us live relatively unassuming lives and are trying to save money to live comfortably in retirement like everyone else.
So, yes, the top 0.01% are probably not paying a lot of income tax and definitely not struggling, but there are lots of people in the top 10% who do pay out quite a bit of income tax. Just because you don’t want to have to part with your income doesn’t mean you hate the poor. You just want to keep what you worked hard for just like everyone else.
August 22nd, 2008 at 3:14 pm
Rick,
I don’t think most people on public assistance believe they are entitled to something. Most would love to have a job, which would allow they to support their family. They come to need that help for a variety of reasons, but I think very few have the idea “I am going to live high on the hog on food stamps and Section 8 housing”
It always amazes me how upset people get about a small few abusing the welfare system, while not caring about the billions unaccounted for in Iraq or countless other places in government.
The politicians have done a wonderful job of diverting attention away from the real waste in government that people should be shouting from the mountain about. It’s much easier for people to relate to Billy Bob abusing his food stamps, then imagining billions of dollars being stolen by government contractors.
August 22nd, 2008 at 3:24 pm
You can debate the flat tax until the cows come home, but the fact is if it is enacted (which it never will be) the rich will end up paying less and overall taxes received by the government will decrease.
So we would either have to cut programs, which since nobody dares cut the military would come from education/social programs which disproportionately benefit middle to lower income people. Or raise taxes in some other manner, which defeats the purpose of the flat tax. Or more likely, spend the same and increase our national debt, in essense raising the birth tax on future generations.
None of these alternatives I imagine would seem very exciting to the majority of people.
August 22nd, 2008 at 3:44 pm
A flat tax? Don’t you realize we already largely have a flat tax? Nearly all income growth is far above the top level so income is largely flat taxed. The rest is just that of the little people and doesn’t amount to much.
August 22nd, 2008 at 3:48 pm
All these arguments about the tax system being unfair reminds me of an old argument about the racial inequality in the USA. If being blacks will entitle you to all those benefits, affirmative actions, scholarships, quotas for getting into colleges, but not one white person is willing to be black!
If being rich is such a chore, why don’t you live an unassuming life in the urban environment, in a cardboard box at the park, eat out every day at the soup kitchen, lounging around all day at street corners to wait for someone to give you money instead of saving your hard earned cash! Who needs tax shelters when it’s all tax-free income!
Most of us work hard to be where we are today and those at the bottom do have to bear some responsibilities to be where they are today. But this constant hating on the poor or directing our anger at the government is just plain silly. I don’t like to support others, I have no kids to take advantage of the school system yet I still pay my property tax. I’m still young and yet I pay my share of health insurance premium. I’m paying into the social security system that I probably won’t get anything out.
But do I complain about my current position? I know it’s not easy to be rich, but I’d rather be rich than be poor, just as I’d rather be white than be black. It’s easy to be keyboard jockeying on here to debate the fairness of our tax system until you don’t know if the next fist coming near you is to give you tax-free money or to impale you with a knife.
August 22nd, 2008 at 3:52 pm
Here is a list of reasons for progressive taxation.
Practical arguments
1) Can’t get blood from a turnip
2) Got to go where the money is
3) Some gov’t spending explicitly supports the poor. It’s silly to tax the poor or lower middle for this spending
Incentive arguments
4) High earners make more per hour, consequently higher tax rates on them leave more level incentive to work
5) It’s better to tax dumb luck than hard work (this may be identical to (4), or may be a “fairness” argument)
Utility arguments
6) High income/high wealth have more to protect, hence should/would pay more for protective services
7) Same as (6), but expanded to entire social structure
8.) Low income get more utility from marginal income, hence we increase total utility by shifting taxes to higher income
Social structure arguments
9 ) Prefer more uniform distribution of income/wealth – don’t like societies with extremes of rich and poor
10) Concentration of wealth gives excessive power to a few (this also supports wealth taxes)
Fairness argument
11) Our system generates large (unfair) differences in opportunity, progressive taxes somewhat offset this
August 22nd, 2008 at 4:01 pm
One should consider each individual a business and allow them to deduct the costs of earning that income and then one can consider a flat tax above that. That would correspond to a standard deduction of perhaps $50k instead of $5k. Would you prefer that?
August 22nd, 2008 at 4:38 pm
Tim, That has to be just about the absolute worst use of race in an analogy I have ever seen. Think about it. Does that mean given a choice between being a dirt poor Appalachian white person vs being a rich, famous black person, you would choose to be white… and exactly why is that?
Think before you type man.
August 22nd, 2008 at 5:12 pm
Not exactly. You are simply going straight down the line. What if they max out their 401(k)s? Okay, their tax burden is now reduced. IRAs? Drop the number a little lower. Rental properties? Go down further. I find it surprising on a site where you show methods of saving money that you fail to account for these things. Wealthy people have excellent accountants that lower their tax burden.
Warren Buffet has an effective tax rate of 17 percent:
http://taxprof.typepad.com/taxprof_blog/2007/06/warren-buffet-p.html
I think I’ll listen to the world’s richest man on this subject. Since you are going after Obama, I wonder how many people know how many homes they have?
Then you have for example, back room deals like some of the subprime lenders who are now going to get rebates because they are using tax loopholes to retroactively write-off today’s losses onto yesterday’s gains. Hey but they pay 20 times in taxes right?
August 22nd, 2008 at 5:14 pm
I’m a little tired of the argument that the “rich” are unfairly taxed or that lower earning individuals make a choice. Often, I hear those same people balk at the salaries of teachers and firefighters.
If we all chose to earn more, who will educate our children? Who will put out fires or transport accident victims to the hospital? Who will pick up our trash? Should we pay them more? Gosh, wouldn’t that mean higher taxes?
Or, should we insist that they pay more in taxes to lessen the burden of those that are earning more money? Wouldn’t reducing their take home income either discourage people for taking those jobs or require a greater amount of public services to make up the difference? Either way, it would lead to a need for more tax revenue.
Government, big or small, costs money, and people have to pay for it somehow. If the rich want the not-so-rich to pay a larger share, than the rich will have to pay more taxes in order to afford to tax the not-so-rich more proportionately.
Cut the baby in half, King Solomon!
There is no “fair” answer, except maybe Communism.
August 22nd, 2008 at 5:18 pm
When I was growing up, I used to come home and complain to my mom because the teacher spent more time with the other kids. I would basically be ignored while the teacher ran around to a lot of the other students helping them with figure out various concepts. Then one day, report cards came out and as I handed it to my mother, I complained yet again about how the teacher didn’t spend any time with me at school. My mother looked at my report card and said, “Stephie, you have straight A’s and I bet the kids the teacher is focusing on don’t. Fair does not mean equal.”
And she was right. If the teacher would have spent a lot of time with me, those other kids would have suffered. A lot of those kids barely ended up graduating as it was. That teacher was being as fair as she could considering the circumstances she was in. And there I was, whining like a petulant brat for equality when I already was a step up on all of them.
Just a thought.
August 22nd, 2008 at 5:20 pm
JLP wrote: “I understand that life isn’t fair but that doesn’t mean we have to make it purposely unfair. I see nothing unfair about making Pete pay $50,000 in taxes or the same percentage as Joe.”
That’s not what would happen. You would have Joe pay the same higher taxes as Pete when Joe can’t afford it. The bottom line is very simple: in order to generate enough tax revenue to make flat tax work, the burden of the tax has to shift from the rich to the middle class and poor. How exactly is this a fair or a good thing (well, good only if you’re rich)?
August 22nd, 2008 at 5:30 pm
Leonard,
The lowest tax bracket we have now is 10% so I fail to see how Joe couldn’t afford to pay a 10% flat tax.
August 22nd, 2008 at 5:44 pm
My wife switched to part-time work last year to reduce our taxes. That opened up eligibility for some tax deductions that we did not qualify for previously. A system that discourages work is not a good system.
August 22nd, 2008 at 8:14 pm
To be fair, anybody who can’t remember how many houses/condos/lofts he or she owns ought to have to surrender them to the government.
If you’re that rich (or senile), your property should be confiscated.
August 22nd, 2008 at 8:41 pm
Wait a minute, where’s the GROSS income? It’s quite possible for Joe to pay a higher EFFECTIVE tax rate than Pete, if Joe gets no tax breaks and Pete is loaded with them.
For example, what if Pete (and his wife filing joint) has a vastly larger gross income with maximum tax breaks including a whopping $500K capital gain exclusion on the sale of his personal residence?
Yes, it’s unlikely – especially since Pete gets screwed out of many tax breaks commonly enjoyed by middle class taxpayers – these stars aligned just right for Pete to pay a lower effective tax rate than Joe, but it’s possible.
And as others have pointed out, outcomes aren’t quite as extreme when you consider payroll taxes, which are commonly omitted in the context of spins like this one.
As a low-wage childless renter without fringe benefits, I can point to my group of taxpayers as one that often pays higher effective tax rates than families in the $50K-$100K range, and thus as one group of taxpayers getting ripped off.
August 22nd, 2008 at 8:48 pm
This thread reminds me of a stat I would LOVE to see.
I’ve read that taxpers in the top one percent by income pay something like 40 percent of the (income) taxes in this country, and have something like 20-25 percent of the income.
The implications is that they are obviously being gouged by the taxman.
Stat I’d love to see: How much of the total DISPOSABLE income does the to one percent have? And how does that compare with their tax burden?
The argiument employed here implies that the middle class and (esp) the poor aren’t payinfg their fair share of tax.
So…how much tax should someone without disposable income pay?
August 22nd, 2008 at 8:50 pm
Whether or not our tax system is fair or not, progressive or not…who made the determination that a $250,000 and up salary defines the rich? Have those people ever tried raising a family in Manhattan?
And while it might make sense that someone earning $400k/year is in a higher tax bracket than someone earning $300/year, why is that person who is earning $400k/year in the same tax bracket as someone who is earning $40M/year?
My last question to ponder… We all talk about budgeting and living within our means. Why is the government exempt from this idea? It would seem that the government’s budget should be based upon its projected revenue, not the other way around. It seems like we spend the money, then try to make as much of that money via tax revenue and for any deficit, just borrow the rest. Haven’t we learned that abusing credit is a bad thing and maybe we should be spending within our means (even if it means cutting back on what some people want)?
August 22nd, 2008 at 9:11 pm
@Lord: Comment #28 was succinct and beautiful.
@Rick: Comment #36: that is definitely the downside to taxing income.
Perhaps it isn’t income tax we really need, but wealth tax. I.e. consider all wealth to be property and extend property tax appropriately.
For investments and the like, I could imagine it not unlike the management fees we pay for mutual funds. For savings accounts, it would be like a little bit of negative interest.
It would have the socially positive redistribution properties. Of course it would completely counter the idea of incentives to save.
August 22nd, 2008 at 10:02 pm
Evan said:
Whether or not our tax system is fair or not, progressive or not…who made the determination that a $250,000 and up salary defines the rich? Have those people ever tried raising a family in Manhattan?
As one stuck in the neighborhood of $15K, I can’t afford to have a family anywhere in this country. Nobody has a “right” to have a family they cannot afford. Did you think there was a right to have a family in Manhattan on $250K?
August 23rd, 2008 at 7:13 am
This is why a flat percentage-based consumption tax is the most “fair” if you assume that each of us must pay a fee back to the government/society for access and availability for the goods and services we use and consume.
Look at 2 people that spend $20,000 each per year on goods and services. They get what ever benefit they choose with the money they spend. Should they be taxed any differently?
What if the only difference between them is one person makes $20,000, and the other, $50,000. Do you think they should be taxed differently? If so, why? Money in a bank or under the mattress provides no benefit to anyone. You can’t eat it, wear it, live in it or ride in it. As economists state, money is a store of value. If you say money buys power, I say tax that spending, too.
August 23rd, 2008 at 3:31 pm
JimmyDaGeek Says:
This is why a flat percentage-based consumption tax is the most “fair” if you assume that each of us must pay a fee back to the government/society for access and availability for the goods and services we use and consume.
Richie Rich (or his cook) buys a 5-lb bag of oranges for $7.
Joe Ghetto doesn’t have a car and there are no supermatkets in his neighborhood, so he gets his groceries at his neighborhood ripoff store. On the rare occasions they have (poor quality) oranges in stock, Joe pays $8 for 4 lb of oranges.
Whose consumption in this example is greater, and who should pay the greater amount of tax?
August 23rd, 2008 at 3:35 pm
JimmyDaGeek Says:
Look at 2 people that spend $20,000 each per year on goods and services. They get what ever benefit they choose with the money they spend. Should they be taxed any differently?
If this is an argument in support of the FairTax, it fails. Under the FairTax, two people can each spend $20,000 yet pay vastly different amounts of tax.
And in my earlier example, Joe Ghetto spent more for 4 lb of oranges than Richie Rich spent for 5 lb of oranges. Who received the greater benefit?
August 23rd, 2008 at 4:01 pm
Terry,
Under the fairtax, people would receive prebates on the amount that would have been spent on taxes up to the federal poverty level. According to the book, this would have amounted to about $6,000 in 2006.
I still don’t enough about the consumption tax to know whether or not I like it.
August 23rd, 2008 at 4:33 pm
“AMT only impacts you if you have very high deductions through things like home deduction or high state taxes, etc. Max AMT rate is 28% where as max marginal rate is 35%. ”
Translation: if you live in a high tax state like NY you may be hit by AMT even if you aren’t “rich”. A family with 100-200K income may be hit with AMT if they live in NY and have a few kids — both exemptions for kids and state and property taxes have to be added back under the AMT. Even somebody earning 50K can be hit with AMT if he happened to have capital gains one year. While the rate for long term capital gains is still 15% under the AMT, the amount of additional income may be enough to put your income to where the AMT exemption starts to phase-out.
Another “feature” of AMT that destroyed the lives of many telecommunication and start-ups employees in early 2000s is its treatment of incentive stock options (ISOs). These people weren’t high executives – many start-ups paid parts of engineering, even sometimes even low secretarial salaries with ISOs. Under the regular tax code ISOs are taxed when you sell stock, under the AMT – the moment you exercise the options i.e. when you use options to buy stock. E.g. if you got an option to buy stock for $10 and it is worth $100 when you exercise your option and buy stock, you have to pay AMT on $90 this year. Even if early next year the stock drops to $0. Under the regular tax code, you don’t owe any taxes until you sell stock. Many people, often under advice of their broker, exercised ISOs and wanted to hold on to stock for a year to get long-term rather than short-term capital gains. Except for the next year, the market crashed, a $100-someting stock became worthless, but they still owed a lot of money to the IRS, sometimes hundreds of thousands (and this on top of losing their savings and often their jobs). You may say these people were greedy, they should’ve sold their stock at the top the moment they exercised AMTs, but how many people really know about AMT? I heard a phone call to Suze Orman show, when she suggested to a woman planning to exercise her ISOs to hold on to stocks for a year to pay long-term tax rate. I was ready to scream – what about AMT???? BTW – it didn’t affect me personally, I found out about this by accident when I had to fill out AMT and was looking for something I needed on the internet.
AMT is also extremely unfair as it is more likely to hit those in 150-300K range living in high tax state than those with income over 500K. As soon as your salary gets higher or close to the end of AMT exemption phase-out range, you may get hit by the AMT. If you earn over 500K, your top rate may already be higher than AMT, so you may not be affected. Additionally, the lower rate for capital gains still holds under AMT, so those with extremely high income that comes from capital gains aren’t affected by it.
August 23rd, 2008 at 4:44 pm
“As one stuck in the neighborhood of $15K, I can’t afford to have a family anywhere in this country. Nobody has a “right” to have a family they cannot afford. Did you think there was a right to have a family in Manhattan on $250K?”
What if you were offered a 100K job in Manhattan, would you say no because of the cost of living there? What if that had been a type of job you’d really enjoy doing, your dream job? What if your profession was such that the only place you could get a job was in Manhattan?
I love it when people who have no skills or skills that can be in demand everywhere give advice about moving to a cheaper place. For many of us, the reason we live where we live is our jobs. In some cases like that of a friend of mine who is an opera accompanist/opera vocal coach talented enough to work with stars, Manhattan has always been the only place she could’ve had a career. For others e.g. engineers, scientists, the jobs in places like Silicon Valley, lower NY state or Boston may simply be the only ones that can utilize our talents.
August 23rd, 2008 at 7:15 pm
Kitty says:
What if you were offered a 100K job in Manhattan, would you say no because of the cost of living there? What if that had been a type of job you’d really enjoy doing, your dream job? What if your profession was such that the only place you could get a job was in Manhattan?
Many people DO say no to job opportunities on the basis of higher cost of living.
Fortunately, there is a cheap housing opportunity available to me in Jackson Heights if I were to get a $100K job offer.
August 23rd, 2008 at 7:17 pm
Kitty says:
I love it when people who have no skills or skills that can be in demand everywhere give advice about moving to a cheaper place.
How often does that happen?
August 23rd, 2008 at 7:19 pm
JLP says:
Under the fairtax, people would receive prebates on the amount that would have been spent on taxes up to the federal poverty level. According to the book, this would have amounted to about $6,000 in 2006.
True; my objection is that at all income levels, renters pay more tax than homeowners on equal spending.
August 24th, 2008 at 12:59 pm
The basic misconception here is the point of a progressive tax is to make the rich pay more; actually it is to make the non-rich pay something because they can not afford to pay much since most of their money is absorbed by the cost of living. With a reasonable estimate of the cost of living, the bottom half would no longer be paying any tax. They work to survive, not to profit. One of the biggest flaws of the fair tax is its presumption of the poverty level which is a standard that hasn’t been updated in decades.
August 24th, 2008 at 4:02 pm
Lord, the progressive tax is to make the rich pay more. There is no way around that.
You are wrong if you honestly believe that the bottom half works to survive. If you’re paying for cable TV, which is not something exclusive to the top half, then you’re working to profit. Just because your idea of the bottom half has poor money management skills does not mean that they are working to survive.
That the poverty level hasn’t been updated in decades is not a flaw of the FairTax; that is a flaw in whichever portion of the government is responsible for such figures.
August 25th, 2008 at 8:15 am
Don’t worry, rich people don’t pay as much tax as the charts indicate. It’s nowhere near the %age because they have access to a whole different set of tax rules.
August 25th, 2008 at 4:14 pm
One of the important purposes of taxes is to pay for basic services and infrastructure that are used by all or most of the population. This includes paying teachers, police, firefighters, maintaining structures such as bridges (witness the Minneapolis collapse). This money has to raised somewhere and when huge sums are wasted paying for foreign wars then even more money needs to be raised. You are not going to get this money from people who are barely affording their minimum living expensies, so it is only logical this money has to come from higher taxes on wealthier people. Isn’t this logical?
This is money well spent – it is an investment in the future of the country and all our children. There may be a few people that take advantage and the government should try to prevent this, but most of the money is needed for services we all use. And you never know when you may be hurt or disabled by illness and need help yourself sometime in the future. No one think this will happen to them or their loved ones, but you never know what lies around the next corner.
August 25th, 2008 at 7:27 pm
Those local taxes which pay for basic services tend to be regressive, and not at all progressive.
August 26th, 2008 at 11:18 am
I wish for all the people who complain about increasing taxes would spend half as much time demanding the government display some fiscal responsibility and balance the budget.
For sheer financial reasons alone, I am surprised that more people did not protest the war in Iraq. Undoubtably some citizens have become very rich off this conflict, but the vast majority of us will be paying the bill (and the interest on the bills) for many many years to come.
August 26th, 2008 at 8:31 pm
No, really, I wanna know – how does giving away 10% of your income improve your financial situation? It doesn’t make sense.
August 26th, 2008 at 8:51 pm
G.L.,
Logically, it doesn’t make sense (read Malachi 3:8-12). But, for us, it worked.
November 19th, 2008 at 5:09 pm
You may want to have a look at Debatepedia’s pro/coin article on progressive taxation. I think it will illustrate the broader arguments in the progressive vs. flat tax debate.
http://wiki.idebate.org/index.php/Debate:_Progressive_tax_rate