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Analyzing Possible Future Tax Increases

By JLP | April 12, 2010

I just read this article:

‘Earthshaking’ Ways to Fix U.S. Debt

According to the article (and common sense) there are three ways the U.S. can get its debt under control:

• Cut spending

• Raise taxes

• Some combination of both

The article then went on to explain what would have to be done if the debt were to be paid off strictly from increasing income taxes. One of the ideas is to raise all the brackets by roughly 1/3.

Let’s explore that idea.

Here’s a look at 2009′s brackets (married) and the amount of tax paid on a taxable income of $100,000:

Now, here is what the impact of raising tax rates on the brackets would have on the same taxable income of $100,000:

That’s an increase of roughly $500 per month in federal income tax. For a family with $50,000 in taxable income, the difference would be nearly $200 per month.

It’s also going to impact those at lower income levels because the rates on the lower brackets would increase along with all the other rates. HOWEVER, due to credits and such, the impact wouldn’t be as bad for them.

We have to decrease spending. How? What? I have no idea.

Oh, and for those who think we should just put the entire burden on the “rich,” I’d like you to read this editorial that was in the WSJ recently: The Rich Can’t Pay for ObamaCare. In other words, the rich (including the congressmen and women who voted for this bill) will simply find ways to avoid paying taxes.

UPDATE: I wanted to add that these numbers begin at taxable income which is your income minus deductions and personal exemptions. If any changes occur to these areas, your tax burden could be higher. Also, keep in mind that the brackets are usually adjusted on an annual basis for inflation.

Topics: Taxes | 26 Comments »


26 Responses to “Analyzing Possible Future Tax Increases”

  1. JT Says:
    April 12th, 2010 at 2:24 pm

    I get the feeling that this article is going to generate some mixed responses, to put it politely.

    :)

    Here’s the best suggestion I’ve heard:

    1) Release all non-violent offenders from our prisons.
    2) Jail the 535 members of Congress in their place.
    3) Rejoice!
    4) Profit

  2. Ron Says:
    April 12th, 2010 at 3:27 pm

    The fact is, since Obama supports a budget in 2011 with a $1.6 TRILLION deficit, you can take ALL the earnings of the rich and it still won’t be enough.

    Yes, one point six trillion. That’s four times the deficit under Bush (for which Obama raked him over the coals).

    There’s a word for that and it (ironically) rhymes with bureaucracy …

  3. JLP Says:
    April 12th, 2010 at 3:38 pm

    I have my doubts that the tax rates on the lower income brackets will be raised. There’s just too much political risk for elected officials to go there. Instead, they’ll demonize the “rich” and tax the hell out of them.

  4. Courtney Says:
    April 12th, 2010 at 4:27 pm

    I saw a summary of a poll that The Economist released earlier this month about ways to fix the deficit. They first asked, “What’s the best way to fix the deficit?” Only 5% chose raising taxes; 63% chose cutting spending. The follow-up question to those people was “Out of this list of areas where the government spends money, what should they cut?” The only answer that got an overwhelming majority (~70%) was ‘Foreign Aid’ – a whopping 1% of the federal budget. Only four other categories got a 25% consensus: the environment, housing, agriculture, and mass transit (totaling 3% of the federal budget). A full 12% answered ‘none of the above’ (uhhh….)

    Enlightening stuff. Basically, a lot of Americans are going to be in for a big wake-up call.

  5. JLP Says:
    April 12th, 2010 at 4:38 pm

    Courtney,

    I know…we’re all for cutting stuff as long as it’s not the stuff we use/want.

    The answer is a smaller FOCUSED government. A government that’s focused on it’s responsibilities to its citizens.

    The thing is…I wouln’t mind higher taxes AS LONG as EVERYONE is paying their FAIR share and as LONG as it’s paying for good government. I don’t like people getting free rides off the backs of others (even the “rich” evading taxes).

    What I don’t like is a government that promises the moon and worries about the cost later.

  6. TJ Says:
    April 13th, 2010 at 3:05 am

    Just to put things in a perspective, here are the Dutch incometax brackets:

    €18.218 or lower 33,45%
    €18.219 – €32.738 41,95%
    €32.739 – €54.367 42,00%
    €54.368 or higher 52,00%

    Yes we do pay a lot of taxes but our governmental services including health are accesibile for everyone. I’m not claiming that this is the best solution out there but it makes live more comfortable for the population as a whole.

  7. Courtney Says:
    April 13th, 2010 at 8:23 am

    Also just saw a poll today from Rasmussen that said 66% of Americans believe they’re over-taxed. Given that nearly 50% don’t pay federal taxes, I think this another example of the problem.

  8. Kirk Kinder Says:
    April 13th, 2010 at 8:29 am

    I get tired of seeing how people compare us to European countries whether it is tax rates, VAT taxes, socialized programs, etc.

    Why do we want to be like Europe? We became the most prosperous nation on earth by forging a different path. As we have incorporated more European policies here, we have seen our economic strength diminish. It is no accident that as third world and communist nations have been slowly adding American ideals to their countries that their wealth is expanding.

    Even on the health care issue, cost and inefficiencies continue to rise at the same time government intervention does. The same can be said for education in this country.

    Let’s take the chopping block to all government agencies, including the golden goose – the military. Fifty percent of all military spending is done by the US to protect 5% of the population. Sounds kinda expensive to me. Even if we cut our military spending in half, we would more than double our nearest competitor, China, in overall spending. I served in the military and believe it protects our way of life, but we need to trim the fat. No one pays us to be the world’s policeman.

  9. JLP Says:
    April 13th, 2010 at 8:47 am

    Kirk,

    You are exactly right. When people bring up how the rest of the world does things I think, “What the heck do we care what the rest of the world does?” The same thing goes with caring whether or not the world likes us. Who cares whether they like us or not.

    We have to take special interests out of government. We have to cut pork barrel spending. We have to quit subsidizing everything.

    We need to teach people that the government isn’t there to take care of them.

  10. BG Says:
    April 13th, 2010 at 9:48 am

    Ways to cut spending that I’d support:

    * Eliminate the Dept of Education
    * Put ‘means-test’ on SS benefits
    * Eliminate SS-tax income cap
    * Get out of IRAQ
    * Release all non-violent drug offenders from prison
    * Sell all main highways/interstates to foreign corporations — let them toll the roads for maintenance
    * laugh at any state that wants a ‘bailout’
    * force banks to take back ownership of their toxic waste
    * eliminate tax-exempt status from all religious groups, churches, mosques, etc
    * no more tax-credit checks. You may be able to have a $0 bill, but never a _negative_ amount.
    * eliminate mortgage interest deductions
    * eliminate charity contribution deductions
    * eliminate special dividend tax rates (make it based on income only)
    * set all tax rates back to pre-Bush levels
    * eliminate child-tax credits
    * eliminate all government grants for medical / pharmaceutical research
    * unemployment should be limited to 3 months maximum
    * eliminate all IRAs and 401k plans (including Roth and rollovers, etc)
    * all current federal workers to immediately have pensions permanently halted
    * 10% reduction in all federal employee salaries
    * federal workers to have ‘industry-equivalent’ health-care plans like workers in the private sector
    * sell 1-year contracts to open national parks and other government owned land to oil/natural gas drilling, logging, etc
    * hell, I could go on here all day

    Now, when people start defending items on this list — you’ll see exactly what the problems are with this country.

  11. Courtney Says:
    April 13th, 2010 at 11:10 am

    BG – I agree with some of your list; only have comments or questions about a few. I definitely agree with ‘no more tax-credit checks.’

    Why do you want to eliminate all retirement plans? If you’re going to means-test social security, eliminate pensions, AND eliminate 401K/IRA plans – how is anyone ever supposed to retire? Or do you think everyone should just work until they drop dead?

    Why do you want to cut all federal salaries? There are disparities at the highest incomes, but the average federal worker makes slightly less in salary than their private industry counterpart.

    I don’t think that unemployment benefits should be set at a fixed number of months forever; rather I think it should be a moving target that corresponds with the unemployment rate. It’s generally accepted that one should plan for a month of job search for each 1% in the unemployment rate. Unemployment benefits should reflect this.

  12. BG Says:
    April 13th, 2010 at 11:45 am

    #11 Courtney) I tried to draft a list that would affect everyone in the US. The point is that everyone wants to defend _their_ handout, whatever it may be.

    And since no-one is willing to give up _their_ handout, then it is going to be pretty hard for any single item on the list to be ever be eliminated.

    Anyhow, to answer your questions. You can still save for retirement in vehicles other than 401k and IRAs — they are just tax breaks for people who use those accounts: end result, you will pay more in taxes and the government would be less broke.

    Federal workers ‘total-compensation’ vastly outstrips those in the private sector. From their lavish medical plans, pensions, 401k matches, vacations, etc. Government workers should not expect to get rich while doing the business of the citizens, nor should they be life-long jobs either.

    It is not the government’s job to pay for someone to sit on their butt for 2-years collecting unemployment. After the 3-months, feel free to take a lower-paid government position (actually do some work) while you continue your job search for a better paying job.

  13. Courtney Says:
    April 13th, 2010 at 12:35 pm

    @ BG – Again, the average federal worker does not have a ‘lavish’ medical plan or a pension. TSP matches are a maximum of 5% if the worker contributes 5%. About the only thing they win over the private sector is vacations and job security – not to say these are bad things. I think you’re equating appointed/elected positions (CSRS, about 20%) with positions on the GS system (FERS, about 80%).

    I agree it’s not the government’s job to pay someone to sit on their butt for 2 years. But I do think that unemployment bennies need to reflect the realities of the current job market – hence my suggestion of *realistically* tying it to the unemployment rate.

    It basically comes down to the question of, outside what the government is mandated to do, what do they have a vested interest in incentivizing? I think that education and saving for retirement both fall in that category. I don’t think that procreation, giving to charities, owning a home, or buying energy-efficient windows/cars/appliances do, even though I have benefited from some of these tax incentives myself.

  14. BG Says:
    April 13th, 2010 at 1:26 pm

    #13 Courtney) I admit I don’t know the federal portions, but I have a friend who works for the state. He gets: zero cost health insurance (free), no deductibles, and just this year has to start making a copay ($20) when he goes to the doctor.

    He also gets, THREE TIMES matching on 401k contributions (put in $500, state puts in $1500). He also will retire (after 20-years) with 80% income for life, plus some kind of medical benefit. He will likely ‘earn’ vastly more in retirement than what he ever earned while actually working.

    Compare that with private sector: multi-thousand dollar insurance premiums, multi-thousand dollar medical deductibles (before insurance pays a penny), which after deductibles are met you still pay 20%-30% copays. Perhaps a 1x match on 401k, and definitely no pensions or medical benefits in retirement.

    State/Federal jobs should not be out-competing the private sector when it comes to salary & benefits — otherwise you just get a more bloated government.

    My family (parents & siblings) are huge leeches in the form of gov employees: set for LIFE. They also claim to be conservative/republicans and against various ‘spending’. It is hilarious to watch people rant and rave over petty stuff, when _they_ are the problem. We have over 20 MILLION government employees (local/state/federal) — how many private sector jobs (real tax-payers) do you think it takes to support that many government employees? The answer, obviously, is more than the US currently has.

  15. Courtney Says:
    April 13th, 2010 at 2:03 pm

    @BG – Local and State employees are paid by local and state tax dollars. I’ve been a fed; it was okay. But nothing like what you are describing as your friend’s situation – sounds like you need to take that up with your state reps!

  16. Bret Says:
    April 13th, 2010 at 5:52 pm

    Interesting, BG. I agree with most of your items, but they’d have to be phased in. For example:

    1) Do you grandfather existing retirement plans, or make them pay the taxes on all that money now, after you’ve given people ‘false incentives’ to use the accounts?
    2) I don’t own a home, but the mortgage interest deduction is a huge financial factor in deciding to buy a house (usually a 30 yr. commitment). As a renter, I agree its a bogus deduction, but people relied on it existing when making the financial decision to buy a house, so you can’t just take it away all at once.

  17. JLP Says:
    April 13th, 2010 at 8:00 pm

    Personally, I don’t like the idea of taking away the tax benefits of retirement plans UNLESS they have tax-free withdrawals at retirement.

    I HATE the idea of means testing social security AND removing the cap.

  18. Courtney Says:
    April 13th, 2010 at 10:12 pm

    JLP, agree and agree.

  19. Stacey Says:
    April 13th, 2010 at 11:40 pm

    How would one means test w/any accuracy? I could pull all my/our money out of every traceable acct. How would “They” then know what the hell I/we have?

  20. Courtney Says:
    April 14th, 2010 at 6:52 am

    I imagine it would be based off your income, not your savings – an inherent problem. As in, “According to your social security statement, you made more over the course of your lifetime than our means-test allows. Too bad if you didn’t actually save anything.”

  21. BG Says:
    April 14th, 2010 at 8:26 am

    OK, so strike off the list all the SS related stuff (for JLP), and remove from the list everything related to federal employees (Courtney), and remove from the list the thing about retirement accounts (universal), and the other issues people have brought up.

    See how quickly the list is shrunk as people defend their handout of choice? All we need now is someone from the military, a banker, a ‘green-peace’ activist, a preacher, etc and the list will be gone.

  22. JLP Says:
    April 14th, 2010 at 8:40 am

    I’m not saying changes don’t need to be made to SS. I know they do. But, when you pay over $6,000 per year into the system, you SHOULD be entitled to get something back.

    Also, I fail to see how either not taxing retirement contributions or not taxing retirement distributions is a handout. Either way, the gubment is going to get their’s. It’s not a handout if tax is being paid at some point.

    Although, I’d hate to see them go, I do understand your reasoning for getting rid of the other deductions.

  23. BG Says:
    April 14th, 2010 at 9:39 am

    #22 JLP) Crafty uses of 401ks (and probably Roths) are very effective ways of reducing income-tax liabilities. In fact, I’ve probably made more using my 401k to dodge taxes, than I made on the investments held within the 401k themselves (I’ve finally wised up and am doing what the ‘rich’ are doing).

    If done right, you can reduce your income tax liability to 0% effective (up to a certain amount) on those savings (today and in retirement) — and definitely have a lower effective rate using these vehicles than otherwise.

    FYI: I recently saw an article saying that 66% of US corporations pay no income tax (that’s higher than the 47% of people in your article).

    The list of corps includes GE ($10 billion in pre-tax income, and instead of paying taxes, got a welfare check for $1 billion from us taxpayers), and also Exxon with a $45 billion profit and paid exactly ZERO in taxes to the U.S.

  24. Courtney Says:
    April 14th, 2010 at 9:56 am

    BG, I don’t think encouraging retirement savings and federal salaries are ‘handouts’. The fact is, we do have to provide in some way for our later years and the government certainly has an incentive to encourage people to do so, lest they end up on welfare when they’re too old/disabled to work. And I pointed out that your conception of federal employee fat cats is mostly false.

    So I’m not defending handouts. I’m defending what I think were ill-conceived suggestions. I fully agree that we should a) eliminate negative tax liability, followed by b) eliminate credits entirely. I support certain, sensibly limited *deductions* for things like business and educational expenses, as well as the personal exemptions. I support corporate tax reform, and think that investment income should be treated no differently than wages.

  25. BG Says:
    April 14th, 2010 at 10:44 am

    #24 Courtney) you might think your specific items are not ‘hand-outs’ but they are definitely ‘costs’ that need to be paid for.

    As I’ve said, everyone is going to have their own items (I like to call them handouts) that they will defend and think that everyone _else_ should pay for.

    We currently have slightly over 2 million federal employees, not counting postal workers. The federal government is the #1 friggin employer in the US!

    How ’bout that comrade?

  26. Courtney Says:
    April 14th, 2010 at 12:47 pm

    Ooooh, you’ve totally found me out. I’m totally a secret communist – put a red stamp on my hand!

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