An Illustration of Why I Don’t Like Progressive Taxation

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:

2008 Federal Income Tax Brackets (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:

Income Tax Comparison

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.

One Commenter’s Argument Against the Flat Tax

The posts of this week have led to some very interesting discussions. This is what I love about blogging. Yes, even some of the commenters that I didn’t agree with made some points that made me reconsider my positions.

I wanted to highlight one comment left on the What’s the Definition of “Fair” and “Rich?” post from earlier this week:

“Fair” as a flat percentage is not fair in my opinion for one reason:

Money has a real purpose.

If you make $10,000 a year, and pay, say 15%, you are left with $8,500. $50,000? $42,500. $5,000,000? $4,250,000.

If you make $10,000 a year and you buy a gallon of milk, how much does it cost, $4.00? If you make $50,000? $4.00. If you make $5,000,000? $4.00. Is that a fair percentage?

Money is not an abstract concept. It has a value only in its trade for goods and services. And goods and services do not work as a percentage. You don’t go to a dealership and buy a car for %10 of your yearly income. Why should taxes magically act that way?

The concept of a flat tax, as I understand it, treats money as if it’s fair to take the same percentage from all people, while still allowing money to have an absolute value of its own. This is why I can’t support a flat tax, personally.

I suppose this is the argument for progressive taxation. However, I think we have to be careful with this line of thinking. If I make $50,000 per year and I buy a $25,000 car, that’s 50% of my income. However, if I make $500,000 per year and I buy a $25,000 car, it’s only 5% of my income. Should I pay more for the SAME CAR just because I make more money? No. However, because I do make $500,000 per year, I have the ability to buy a more expensive car if I choose. Afterall, wealth does have its privileges.

When it comes to the everyday items we must purchase, if we want the prices of those items to have less of an impact on our budgets then we have to MAKE MORE MONEY! It’s really that simple.

I look at the flat tax this way: when our boys were younger, we paid them an allowance based on their age. When my oldest son was 8, he got $8 while my youngest son got $7. We required our boys to put back 25% of their money for long-term savings. That meant the oldest had to save $2.00 and our youngest had to save $1.75. We also required them to tithe, which again meant the oldest paid more tithe than the youngest. It was FAIR!

This is the way our society should be taxed! Same percentage for all people. No deductions, no incentives. You make $100,000, you pay $10,000 in taxes (or whatever the percentage would be). You make $10,000, you pay $1,000 in taxes. If the $1,000 tax burden is too much for you, then make more money.

Finally, the thing I would like most about a flat tax is that no one could say that the rich weren’t paying their fair share. Politicians wouldn’t be able to use taxes as a way to pander for votes.

Anyway, I have really enjoyed this week’s discussions (even if I drove a few people away). Those who stayed around really made some interesting comments. I enjoyed them all even if I didn’t agree with them all.

Thanks for reading.