We Need a Fair Tax System

April 8, 2010

Does this income tax example of a family of four making $50,000 per year seem fair to you?

Here’s how they did it, according to Deloitte Tax:

The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.

With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.

The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

I found that example in this article: Nearly Half of US Households Escape Fed Income Tax

Granted, $50,000 per year isn’t a lot of income for a family of four. Yet, I can’t help but think that this family should be paying at least some federal income taxes.

The startling part of that article is the fact that nearly 50% of U.S. households pay NO FEDERAL INCOME TAX.

85 responses to We Need a Fair Tax System

  1. #50 Retired@40) The only flat-tax I’ll ever agree to, is a flat-tax on net-worth — that is the truly fair way to tax people. Since that will never happen, a progressive tax on income is nearly equivalent: the higher your income, the higher your income tax-rate should be — because you have a higher net-worth.

    And of course, we should abolish the SS tax, and just pay for the program through the normal income tax channels (on all income — no caps).

    Since the republicans love Reagan so much, we should just get them to agree to go back to the tax-structure we had under Reagan (higher bracket was at 50% — lol).

    Stacey is gonna love this…

  2. [JLP Says: “But is social security really a tax? It would only be a tax if we contributed and never got anything in return.”]


    YES it is purely a ‘TAX’.

    And Social Security ‘contributors’ have absolutely NO legal claim nor guarantee to any benefits/payouts.

    “Social Security” is NOT a legitimate insurance, annuity, or pension system…. in any legal or actuarial sense. It’s just another layer of taxation.

    The U.S. Supreme Court has repeatedly ruled that Social Security is merely a tax … and that any benefits are paid purely at the discretion of the current Congress; those who pay the SS taxes have no enforceable property right to any benefits (re: SCOTUS decisions– Helvering v. Davis, 1937 & Fleming v. Nestor, 1960).

    Social Security now forces Americans to pay 12.4 percent of their income into a vast Ponzi-scheme totally controlled by 535 sitting politicians.

    Americans have no legal right to that stolen money, cannot leave it to their loved ones — and what they might get back is entirely up to whatever current political whims drift on the Potomac.

    There is NO Social Security ‘trust fund’ … only special, non-negotiable IOU’s from the Treasury bureaucrats– all the previous SS contributions (real $$) have been spent by Congressional politicians. The cupboard is bare, except for current SS tax collections.

    The present SS system structure will go broke within 10 years. Congress will sharply raise SS taxes, cut benefits, and peg the retirement age at 72 years for any retirement payouts at all.

    SS last went broke in 1983 — President Reagan ‘saved’ the system ‘forever’ by raising SS taxes & taxing SS payouts. ‘Forever’ didn’t last long, but the same type ‘cure’ will soon be repeated … only much more painfully for average citizens.

  3. #31 Courtney) also, on your graph, the SS-tax is really 12.4%, not the 6.2% you have listed. For company-employed people, you only see the 6.2% on your paystub, but your employer is deducting the other 6.2% from your salary already. Self-employed people pay both sides (all 12.4%) on their taxes.

    #14 Jeremy) and I’d bet that the bottom 50% pay 95% of the SS-tax. This is another reason why neither tax (ss or income) should be looked at in isolation — especially when considering fairtax, flattax, or any other schemes that would replace both of these…

    #52 DennyM) well said. The SS-tax is absolutely a ‘tax’ in every way shape and form.

  4. @BG (and others): The tax system has two purposes – to raise revenue and to manipulate the public (oops – I mean to raise revenue and to promote socially positive bwhavior).

    A flat tax on net worth would discourage savings and encourage consumption. Since this is not socially positive (because everyone would aim for zero net worth, and would therefore require Medicaid, etc.) it should not happen. Instead we grant tax breaks for saving, buying houses, etc.

  5. #54 Mark) Most places already have a flat-tax on networth for property — property taxes. So, what I am aiming for already exists for wealth held in the form of real-estate in most states.

    And I disagree with your assumption that a flat-tax on networth discourages savings. It encourages _investment_ and discourages _hoarding_.

    There is a big difference.

  6. I don’t like the word “hoarding.” Besides, INVESTMENT would still be part of net worth so it would still get taxed.

  7. Just because one doesn’t pay more taxes on April 15 doesn’t mean they didn’t’ pay tax. presumably they would have had federal taxes withheld from their paychecks all year long.

  8. Sue, the example in the article means that they did not *pay* any federal tax. Their credits exceeded their tax liability, so all their withheld taxes were refunded.

  9. @BG: You’re absolutely right that property tax is a tax on wealth. Older people have to sell their homes when they can’t afford the taxes. Or California protects homeowners by limiting property tax growth so your new neighbor might pay 5 times what you pay. And it seems to have left California unable to fund their education system.

    The estate tax is a wealth tax too – but only hits your wealth once.

    Wealth taxes are not logical. If I earn and save $100,000 in year 1, then I pay tax on it every year until I die. If I spend it on expensive vacations and meals in expensive restaurants, then I don’t pay tax on it. Sounds like a perverse incentive to me.

  10. BG #51, my ranting days are over…until April 16.
    I am considering buying a gun, loading up on ammo and taking my chances w/bootlegging, drugs and prostitution. Cash business will be the only way to go from here on out.

  11. We are suppose to be a nation of individual freedom. Freedom covers personal liberties and should embrace economic liberties as well. You can’t have freedom if you limit personal liberties like free speech, religious tolerance, etc. You don’t have freedom if you treat others differently on the economic front. How is it equal if one citizen pays 15% in taxes while others pay 40%? Just because one person chooses a different profession that provides a higher compensation doesn’t mean that he or she should pay a higher rate. Equality is a cornerstone of freedom.

    By implementing different rates and taxes, the government is choosing who benefits and who doesn’t. That is not freedom.

    For those who talk about social security being regressive or a large tax, you don’t understand taxation. Those taxes are more of a retirement plan. In theory, the government should be putting this money aside to provide a retirement benefit. So these are not taxes in that the government is not suppose to use these assets for defense or other government functions. So the amount someone pays in provides a similar benefit. The more they pay; the bigger their benefit.

    I also think America needs to stop worrying about others wealth. We believe that the more the wealthy have the less we will have. The accumulation of wealth allows wealthy families to live an easy life compared to us. Both of these are fallacies. First, wealth is not a static amount. If you want more wealth, find another job; learn more about proper investment; open a side business; etc. The only thing stopping us from more wealth is us. Second, most wealth does not live on much past the person who earned it. Over 80% of inheritances are spent within 2 years of receiving it. This includes multi-million dollar inheritances. Certainly, some families protect their wealth for future generations. But, this is rare. Families are always rising and falling in America according to Hawthorne.

  12. Amen Kirk!

  13. #59 Mark) said: “..Older people have to sell their homes when they can’t afford the taxes..”

    And rightfully so. If we didn’t have the flat-taxes on property, then all the realestate in the country would quickly get consolidated in the hands of a few. The property tax (and flat wealth taxes) forces people (everyone, rich or poor) to invest and put the property to good use; instead of hoarding. If a farmer is inefficient and can’t produce enough profit off the land to pay the property taxes, then that land will eventually be bought by someone else who can.

    That is capitalism at its finest: the resources will tend to be owned by the people who can make best make use of them — the way it should be.

    #61 Kirk) You are looking at the percentage of taxes based on single yearly incomes. If you look at the taxes based on wealth/networth — then people are paying about the same percentage of taxes under our current income-taxation scheme.

    A very important point that you should try to understand: a progressive income tax is equivalent to a flat net-worth tax — which is fair. Rich & Poor are taxed the exact same with either a progressive income tax (what we have today), or a flat-wealth tax.

    Conversely, a flat income tax would be a hugely regressive tax, making the poor pay vastly more taxes relative to their wealth relative to someone who is richer.

  14. @ Mark: “If I earn and save $100,000 in year 1, then I pay tax on it every year until I die. If I spend it on expensive vacations and meals in expensive restaurants, then I don’t pay tax on it. Sounds like a perverse incentive to me.”

    It’s not perverse at all. Our economy has a strong incentive to encourage people to spend. If everyone were frugal savers, our economy would grind to a halt – thus the government provides a tax advantage to spend money instead of save it.

  15. Kathy Handyside April 11, 2010 at 9:32 pm

    There is something very wrong with a tax system that charges a multi-millionaire a lousy 15% income tax while his $25,000 a year secretary or receptionists pays at least 15% and sometimes more! I’m sick and tired of working class people carrying the entire country! The rich don’t pay because they are too greedy and stingy; the poor don’t pay because they don’t have the money. The working class of America pay for the rich, the poor, and themselves! I’m sick of it! We get absolutely NOWHERE in this country with this stupid tax system! And then the immigrants come in, live tax-free for 7 years, get housing and businesses for which they hire only their family members. Then, when the tax exemption on the business expires, they turn the business over to another family member and the tax exemption keeps going. This is so totally UNFAIR I can’t stand! And here I am, on unemployment, trying to scrape together what I owe in income taxes! Enough, already. When do we working-class people get a break?

  16. @Kathy: Where did you find out that immigrants live tax-free for seven years? I started here as an immigrant, and somehow I missed that party: I paid tax from day 1. I would like to get on the free-ride you know about.

    Also the tax rate: I must be doing my taxes wrong because I have never managed to pay as little as 15%, except when I was earning much less than I am now.

  17. #66 Mark) Don’t know about the immigrant stuff, but I think Kathy is referring to the Qualified Dividend Income Tax rate — which is 15%.

    The ultra-rich guys have managed to ensure that the majority of their ‘income’ is coming in as dividend payments, instead of being treated as salaries, hence they only pay at the flat-rate of 15%.

    Granted, everyone who gets dividend payments are only taxed at 15% on that income. For those in the low/middle classes the vast percentage of our ‘income’ is not in the form of dividends so we are paying taxes at normal income tax rates. For the ultra-rich (think top 0.01% of earners) the vast majority of their ‘income’ is via these dividends…

    Google search for “Warren Buffet Taxes”, and you’ll see where he states that he only pays taxes at 17.7%, whereas his secretary (obviously still well-to-do) was around 32.9%.

  18. Let’s just shoot all the captains of industry dead, have their estates pay their rightful estate taxes, and then we won’t have to have this “ultra rich” vs working class debate any longer.

    Better be careful tho’, as YOU might be the next high-income earner w/the bulleye on your back for Congress to take aim at.

    It’s always easy to b*^$h about how unfair something is. These folks went out and built something from nothing in many cases (or were the lucky offspring to inherit them), employed thousands, produced goods and services that employed people beyond their own employee base (truck drivers to drive the goods to Walmart, purchasing agents at Walmart, etc.) If they’re smart enough to work within the system and pay only “dividend” rates so be it. I’d rather have a captain of industry pay 15% on something s/he earned than handing refundable credits out to people who didn’t. Guess it’s the ol’ ‘teach a man to fish’ mantra that I honor…

    On the other hand, re: athletes and movies stars…

  19. #68 Stacey) Why not give everyone the same tax-rate so we can all benefit from the low taxes that the ultra-rich get to enjoy? I’d love to have the vast majority of my income not taxed at all for Social Security, and I’d also love to have the vast majority of my income taxed only at a rate current reserved for income between $8k and $34k. Just like Warren Buffett.

    Give us all the same rates, then perhaps we can all make it to the top, eh? It’s easy to stay at the top when you pay an unfairly _small_ amount of taxes, and it’s hard to move up from the bottom when you are paying an unfaily _large_ amount of taxes…

  20. @Stacey: I’m with you on this one. We should go a little further and allow everyone to keep the same amount regardless of how much they make.

    Perhaps we could make an exception for those who earn it in a “worthy” manner. Obviously athletes, movie stars, captains of industry, etc. are not worthy, but auto assemblyline workers, truck drivers, plumbers and electricians are. Also farmers, except the corporate ones. After all, they actually do something worthwhile and valuable. I’m not sure about bank tellers or insurance agents – they are really just pushing paper all day.

    Anything earned over this amount should be taxed at a very high rate – how about 100%?

    The government could use all the money collected this way to provide free education, healthcare, housing, and all our other essential needs.

    This system of motivating people to work for the good of others has a fantastic track record in other countries such as Cuba and Russia. I really don’t see why it shouldn’t work even better in America.

    @BG: Did you calculate just how much 17.7% of Warren Buffet’s income is each year? I think this lazy Buffet guy is ripping off the poor by taking far more out of the system than he puts in. He is a clear candidate for the 100% tax bracket.

    Ok – I admit it. I’m being sarcastic.

  21. LOL — I’m not worried, because the 15% Dividend Rate expires this year anyway, it’s going back to pre-Bush levels for 2011, so will be treated as normal income once again.

    The hedge-fund managers and others had a great handout there for awhile, but the changes that are in the pipeline are helping to level the playing field.

    I’m not scared of competing, but it is not fun to play when the deck is stacked against you.

  22. How’s the deck stacked against you BG? You, too, could have a 15% rate (or less based on income) on YOUR dividends. BTW, I’d be thrilled to have a tax rate of 15%, no amt, no phaseout of my itemized deductions, the ability to make a deductible IRA contribution, the ability to have child tax credits for my 3 kids, etc. But alas! I have been targeted by all those unjust and uncapitalistic oinkers in our legislative branch and have become their pawn in “leveling the playing field.” Damn our college educations and work ethic and 4-5 hours of sleep a night!! And the heartache will only continue. So I vow to NOT REST until I’m penniless and can suckle from the treasure provided by our nation’s ‘wealthy’ to put food in my children’s bellies and some refundable tax credits in my banking account. Then and only then will I live the good life…no stress, just do some day care out of the home, cash-based of course…and watch Jerry Springer when the kiddos are napping. Perhaps have a black-market cigarette business on the side–swap cigs for food stamps, etc. I always knew I’d grow and up be an entrepreneur!

    Apparently we want our citizens to succeed…but not by too much or we’ll take it away ’cause it ain’t nice to not share! Isn’t that what we learned in Kindergarten?

  23. #72 Stacey) It’s not April 16th yet is it?

    The people on the bottom and the people on the very top of getting very nice handouts from the government in the form of welfare, huge tax loopholes, and other means.

    I don’t think its fair for people to be able to collect unemployment for two friggin years, collect food stamps & welfare while driving brand new cash-for-clunker cars. And I also don’t think it is fair for Buffett and others to have a dividend rate that is stupidly low compared to income tax rates, tax-payer bailouts of their banks, and government ownership of the crap ‘products’ that they created which caused this financial disaster — so the taxpayer takes on all the risk, and they keep all the rewards.

    It’s the people in the middle that are screwed.

    But for the life of me, I don’t understand why you would defend the poverty level tax rates that Buffett and the hedge fund managers have enjoyed since 2001.

    Perhaps you yourself are one of the recipients of this form of welfare yourself? Or perhaps you are one of the suckers that believes the republican BS that IF you just work hard enough (even though you are going to be taxed @ 35% until you are a billionaire) you might one day be ultra-rich enough to pay nearly nothing in SS taxes, and enjoy the stupidly tax rate of 15%, while everyone else is taxed to oblivion.


  24. BG, Haven’t you read a (sarcastic) word I’ve written? I’m a Libertarian at heart and want the gov’t out of my life. I know we’re screwed for the rest of our working lives re: taxes. And no, the only 15% I pay is on my P&G dividends; unfortunately we’re now in the 30+% tax bracket, just for the record.

    I detest the milkers of the system who don’t raise themselves up by their own damn bootstraps. Of course I also recognize some people are in a bind and need a TEMPORARY helping hand.

    As for the rich folk (not me, I mean the ULTRA rich folk) as long as their income comes in forms other than W-2s and K-1s (subject to ordinary tax rates) ie. the dividends you so fervently believe they’re voluminously receiving, then yes, they will have a lower tax rate on them. So take heart in that that loophole will go away. In the meantime go enjoy the beautiful spring day whereever you live while I go off to tax hell…I mean work.

  25. #74 Stacey) Well said. The government (federal and state) needs to shake the leeches off, and everyone is a leech in one way or another. When no-one is able to _depend_ on the government for their welfare (poor people, hedge fund managers, gov employees, everyone) then they will be forced to start depending on themselves (personal responsibility and all that).

    My effective tax rate is higher than good ‘ol Warren Buffet’s too: I’m at 24% or so. But hell, I guess he works harder than me so he deserves it. But since my effective rate is lower than yours then I guess that means I work harder than you… (*sarcasm*).

    Hopefully we can elect a Congress in Nov that’ll actually start fixing some things — fyi: I’m independent. I dropped party-affiliations 6-7 years ago once I started seeing through all the BS. I want drastic changes made quickly, so my kids don’t have to deal with this mess that we and our parents created.

  26. Here’s a good article, published today, that shows the counter claims to the ‘47% pay no taxes’ link:


  27. BG,

    Regarding your link…

    All he did was broaden the definition of taxes. You add those taxes to what “wealthier” people pay, and their tax rate increases too.

    I agree that it’s not right for dividends (which are predominantly owned by wealthier people) should be taxed at a lower rate than earned income. I think dividends should be lumped in with “earned income” and the taxes paid accordingly (at the same time, dividends should not be taxed at the corporate level).

  28. @BG: I disagree that dividends should be taxed as any other income. There is a very good argument for not taxing dividends at all.

    Stockholders are owners of a portion of a company. The company profits were taxed and some of the leftovers were paid out as dividends. Then they are taxed again as income to the recipient. Double-taxation.

    Interest on the other hand was taken as a business expense and therefore not taxed. Bondholders pay tax on the interest they receive – but this is not double-taxation.

    The case of the hedge-fund managers is more about loopholes that enabled them to reclassify their salary, not an argument about taxing dividends in general. Of course I would also be happy if my company could classify my salary as dividends so I could escape at 15% too.

    You could also argue for not taxing passive income at all. The assets were bought with money which is already taxed. Ot maybe excluding inflationary effects. (Some countries only tax NET interest or NET Capital Gains. They don’t tax the part caused by inflation.)

    @BG: Good luck finding Congress to change things quickly. The quick change will only happen when the US hits a China-triggered crisis similar to Iceland or Greece. Given the various incentives at work, this may take a while.

  29. #78 Mark) That all sounds good and all (corporation paying taxes, etc): but you do realize that 66% of US corporation pay no taxes to the federal government: including some of the largest, GE & Exxon.

    Kinda blows your entire argument for lower taxes on dividends out of the water.

    I don’t think we are that far off from a Greece style crisis, especially now that SS payouts exceed SS collections — the growth rate on our debt is exponential now.

  30. #79). “that 66% of US corporation pay no taxes to the federal government: including some of the largest, GE & Exxon.”

    How do you figure that? The corporate tax rate for a company like Exxon is 37%, so when they were making $40 billion/yr they were really making $60 billion and giving $20 billion to the govt.

    Then all of their employees get taxed at nominally 25% in the USA, and dividend for the investors are taxed at 15%.

  31. @BG 79: I don’t think it blows my dividend argument out of the water. Company profitability vary from year to year. In both 2006 and 2007, Exxon paid approx $30 BILLION in taxes each year.
    In early 2008, their tax bill was $318 million PER DAY.

    Kinda makes double-taxation of dividends real.

  32. Interesting report from the IRS: The top 400 U.S. individual taxpayers got 1.59% of the nation’s household income in 2007, and paid 2.05% of all individual income taxes in 2007.

    This implies that they paid a higher RATE of tax than average. If they had paid the average rate, the percent of tax paid would have matched the percent of household income.

    The same report gives their average tax rate, which is around 17%.

  33. #83 Mark) There are income levels that pay vastly more effective tax rates than 17%. We’ve already established that the highest income people are around 17% (Warren Buffett, for example). Where-as his secretary is around 32%.

    The curve is tilted in favor of the poor and rich — it is really high in the middle. Our tax system absolutely is not the same across the spectrum.

    As for the comment: “… paid 2.05% of all individual income taxes in 2007” — once again, that figure is ignoring the SS-income and payroll taxes [1 below] — which is about half of the rest of the taxes that the gov collects from individuals.

    The quote should really be:

    “The top 400 U.S. individual taxpayers got 1.59% of the nation’s household income in 2007, and paid ONLY 1.14% of all individual FEDERAL taxes in 2007.” — see how things change when you add in Social Security?

    [1] looking at the IRS report, total taxes is listed at $1.115 trillion — in 2007, total income tax and social security taxes was $1.96 trillion.

  34. #83 Mark) Another way way to state your quote:

    “The top 400 U.S. individual taxpayers got 1.59% of the nation’s household income in 2007, and paid 0.0000267% of Social Security Taxes.”

    That is why is it not fair to say how much ‘income’ taxes the rich pay, while ignoring how infinitesimally small the SS-taxes they pay. In 2007, the government collected $1.1 trillion in income taxes, and also $0.8696 trillion in SS-taxes. The SS-tax was 44% of total FEDERAL taxes (income + social security) the gov collected from individuals.