7 posts tagged “taxes”
For tax day I won't belabor the problems with the flat tax (a.k.a. "fair tax"), as that has been done elsewhere. Instead, I'd like to share a little perspective with you.
If you earned the median income of $66,000 dollars this year, were married and filed a joint return with no special deductions (kids, business loss, alien abduction, etc.), then you paid $9,188 in taxes or about 14% of your income.
Stepping back four years to 2005, that $66,000 shrinks to $60,000 [1,2] and the tax bite remains 14% ($8,330).
Going ten years further back to 1995, your income is now just $47,142. Your taxes are $7,043 or 15% of your income.
A decade earlier, in 1985 your income is $22,759 and takes take 18% of it at $4,161.
During 1975, your income is $16,296, of which $4,003 is taken by the 25% tax bite.
The Great Society's bill is a smidge lower. In 1965, your income is $10,201 and Uncle Sam asks you for $2,380 or 23%. [3]
If you like Ike, then your income in 1955 is $8,386 and Dwight will ask you for $2,002 or 24% of it.
And at the end of WWII, your 1945 income is $5,588 of which $1,519 goes to fight against the Nipponese - that's a 27% bite!
So the actual tax rate has dropped roughly by a factor of 2 in 60 years. What was that again about taxes being high?
John [4]
[1] Using Moneychimp to do the adjustment for inflation.
[2] Assuming married, filing jointly, no kids. Also assuming that the tax brackets are distributed evenly between the highest and lowest rates for each year (as that is the only data that I can find right now).
[3] The tax rate goes up from 1965 to 1975 because adjustments to the brackets hadn't kept up with inflation.
[4] Footnotes re-added. They were there, I swear, but the great Vox gremlin must have eaten them.
You remember that plan to tax motorists based on mileage? Well, Obama just shot it down, saying "It is not and will not be the policy of the Obama administration"
Yeah!
Now all we have to do is find another method for funding the road improvements [1] - and keep the states from imposing a vehicle mileage tax.
John
[1] My suggestion of raising the gasoline tax in order to encourage a move to more efficient vehicles still seems the most reasonable to me, but then again, I made it...
At target today, I bought a copy of H&R Block's Tax Cut [1]. When the cashier handed me my receipt, there was a coupon good for $5 off H&R Block Tax Cut. I know that they want me to give it to a friend to encourage them to buy the software at target - but I'm going to take the software back, get my money back, and then buy it again using the coupon [3].
John
[1] I've used them for four years now and really like the software. It is easy to use, double-checks to see that your information is correct, and will efile your return.
[2] Yes, I'm putting my taxes together now. If the government owes me a refund, then I want it as soon as possible. And if I owe them money, I can still wait until April 15 to file.
[3] Why, yes, Ebeneezer Scrooge is a personal hero. How did you know?
A while back, I wrote about the law of unintended consequences. Today, the news brings us yet another example: hybrids may make highways unusable. Here's the thinking on it:
But don't fear! Our ever-loving government has a plan to fix this problem: They'll start taxing mileage instead. How? By putting a GPS unit in your car that will talk to the gas pump and add the tax on every time you fill up. And they promise that no detailed information will be kept [1] - but the unit may track when you drive so that rush-hour miles can be taxed at a higher rate than non-peak ones [2]. The system has already been tested in the state of Oregon, which is bragging that they are in the forefront of solving the problem.
- Highway improvements and repairs are paid for by gasoline taxes
- Hybrids use less gas to travel the same distance as less efficient cars
- Thus, as more hybrids take to the highways, there will be less tax revenue which means less money to pay for repairs to the highways
They are right that this is a potential problem. But I like the solution even less than the problem. Instead of GPS units, why not give every driver a RFID tag that links directly into an automatic deduction program [3]? Or have the toll tag linked to the central system that then tells the gas pump how much tax to add? And, even if the privacy concerns are fixed, do we really want to punish people by giving them a higher tax rate for having a more fuel-efficient car (which is what this will do)? I'm not against a useage-based tax per se [4], but this is a stupid way to go about it.
Think about it. In order to get the same gas taxes paid by a fleet of 50 Priuses (40 mpg) and 50 Hummvees (10 mpg) traveling 12,000 miles per year each, they would have to charge a penny per mile. Under the gas tax, a Humvee would pay
Sounds like a typical government solution to me!
John
[1] Any bets on that lasting more than six months? Once they "discover" that they can use the GPS to solve crimes [a], they'll say that only criminals would have anything to hide and make it mandatory for everyone. Soon it will give out automatic tickets for speeding, driving on the wrong day, and wearing funny colored socks.
[2] They claim that they will get rid of the gasoline tax [b], which means that your gas prices will decrease slightly. (But not by as much as the tax, as the oil companies will keep about half the difference.)
[3] We already have this technology installed and working on toll roads, so it wouldn't expand things too much.
[4] Though, like the flat tax, this ends up being a regressive tax.
[a] "Think of the children! Won't somebody think of the children?" [i]
[b] Does anyone believe them on this? Politicians seem consitutionally unable to get rid of taxes [ii], corruption, and useless bureaucracy.
[i] Geek points for the reference!
[ii] Even when they decrease some taxes, they raise others. It is a giant game of "Whack-a-mole" - and we're the moles!
As you may have noticed, the topic of taxes crops up in my blog from time to time. Recently, I came across a really nifty simulator that allows you to tweak the budget and tax code to see what the result of your priorities would be [1]. I've played it a couple of times and had fun [2]. To share the joy, I proudly give you the link to Budget Hero. Enjoy!
John
[1] The result of mine was a budget surplus, a reduced debt, and increased national security.
[2] OK, so I'm verging on becoming a nerd in politics as well as science and literature. Sosumi.
The candidates (and PotUS) have filed their taxes, so we can indulge in a bit of ethics checking by comparing the amount that they paid to the amount that they "should" have paid [1]. The numbers are somewhat interesting:
- Filed: Joint
- Income: $719,274
- Taxes paid: $22,1635
- Effective tax rate: 31%
- Nominal taxes owed: $230820
- Percentage of nominal taxes paid: 96%
- File: Single
- Income: $405,409
- Taxes paid: $84,460
- Effective tax rate: 21%
- Nominal taxes owed: $120,967
- Percentage of nominal taxes paid: 70%
- Filed: Joint
- Income: $ 20,400,000
- Taxes paid: $5,100,000
- Effective tax rate: 25%
- Nominal taxes owed: $7,119,074
- Percentage of nominal taxes paid: 72%
- Filed: Joint
- Income: $4,200,000
- Taxes paid: $1,400,000
- Effective tax rate: 33%
- Nominal taxes owed: $1,449,074
- Percentage of nominal taxes paid: 97%
The
candidates all paid less than the average tax rate [2] for their 2007
taxes. McCain is the greatest tax cheat/smartest taxpayer, laying out
just 70% of the what the tables say he should owe. Clinton comes a
close second, paying just 72% of the nominal amount. Both Bush and
Obama paid nearly the full amount.
As with all things political, you can look at this two ways. Either McCain and Clinton are smart enough to find the deductions hidden in the tax code, so they should be praised and voted for. Or Bush and Obama are honest enough to only take those deductions that they know they have earned, which means that they should be praised and voted for. Of the two sets, the latter is probably closer to what the typical American pays [3].
In either case, it is interesting food for thought.
John
[1] "Should" meaning that they only have the standard deductions and only earned income. If Bush had earned his $719,274 as capital gains on stocks, then he would have been liable for only about half of what he paid in taxes as the current capital gains rate is 15%.
[2] Calculated using Moneychimp.
The average rate is the actual rate at which you pay taxes, as opposed
to the "marginal rate" which is the rate at which your highest level of
income is taxed. If you earned $100,000 last year, your first $7825 was
taxed at 10%, the next $24,025 would be taxed at 15%, the next $45,250
would be taxed at 25%, and the remaining $22,900 would be taxed at 28%,
so that the average rate would only be 22% even though the marginal
rate was 28%. Clear as mud, no? S'why CPAs make the big bucks... In
general, the higher your income, the closer you should come to paying
the marginal rate.
[3] How many of you have $125,461 in itemized deductions?
A friend sent me an email with the treatise below in it. As this is the fourth time this particular missive has come to me, I'm tackling it once and for all here and now. The body of the email goes like this:
This piece is variously placed in a bar, a restaurant, and a golf course; the authorship is similarly suspect. But what about the economics? Is that sound?Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men, the paying customers? How could they divide the $20 windfall so that everyone would get his fair share?
They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.
So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
Each of the six was better off than before. And the first four continued to drink for free. But once outside the bar, the men began to compare their savings.The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now pay $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings)."I only got a dollar out of the $20," declared the sixth man. He pointed to the tenth man, "But he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I did!"
"That's true!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"
"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!
And that, ladies and gentlemen, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up any more. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
Not really. You see, what this piece ignores is the purpose of the tax code. If you are like most people, you probably think that the idea behind taxes is to pay the government's bills [1]. But, in the words of my structural geology professor, that answer is correct but not complete because taxes do more than pay bills. They also shape our society.
The way the American tax code is structured (progressive, income-based) is intended to increase the number of times that money changes hands, thus creating wealth and increasing the size and prosperity of the middle class. Thus, by taxing those who would use the money to concentrate wealth as opposed to those who would use it to create wealth, the tax code creates a stronger America. This can be seen in many places from unemployment to the size of the deficit [2].
Here's a quick check on the statement. During Clinton's terms, the tax rate was higher on those earning more than $200,000/year than it is now. During Clinton's terms, the deficit became a surplus and the national debt was paid down. During Bush's terms, the tax rate was reduced, most dramatically for those earning over $200,000/year. During the same time period, the surplus became the largest deficits in history, and the national debt doubled. Which of these two eras do you think did the most to strengthen America? Which did the most to strengthen the middle class? Are you better off now than you were ten years ago? If you are like the average American, then your answer to that is probably a resounding "No!". Similarly, during Reagan's tax cut and spend era, the USA changed from the world's largest creditor nation to the world's largest debtor nation. Thus, we can say that lower taxes in and of themselves do not create wealth or a more stable society [3].
There are undeniable problems with the current tax code. It is too complex and incomprehensible [4]. It has too many loopholes for special interests [5]. It treats different types of income vastly differently [6,7]. And, most importantly, it doesn't completely fund the government [8]. Other tax codes have been proposed, but they are usually either impractical or worse for the middle and lower classes than the current code.
The most popular of these is the soi disant "flat tax". Its chief virtue is its simplicity [9]; everyone, from the poorest banker to the richest farmer, would pay at the same rate. This would either be done as a simple tax on income or as a more abstract tax on consumer goods. However, in any variation the flat tax has several problems.
The first and foremost of this is the tax rate that would be needed. Let us assume that we replace the current structure with a flat tax that is "revenue neutral"; that is, one that does not increase the deficit. The proposed 2008 US budget is $2,758,000,000,000 and the mean US income in 2006 was $66,570 for the 116,011,000 households reporting income. That makes a total income of $7,722,852,270 (ignoring corporate income taxes, licensing costs, fines, fees, and so forth). In order to generate the needed amount using a flat tax, we would have to tax everyone at a flat rate of 36%. If we assume that corporations also pay income tax at the flat rate, then that brings the flat rate down to about 28%. In effect, a flat tax is a tax hike for all but the wealthiest.
As a sales tax, the problem is even worse. That's because sales taxes are inherently regressive; that is, they cost more if you are poor than if you are rich, both in absolute terms (as total dollars spent) and relative terms (as a proportion of the household income). Sales taxes are easier on those with abundant resources in absolute terms because they can easily commute to where resources cost less and because they can buy in bulk, allowing them to wait for market prices to decrease. If I have to pay $2 for a 5 lb bag of sugar, and you pay just $8 for a 50 lb bag, my tax rate would be higher than yours. Sales taxes are easier on those with abundant resources in relative terms because the proportion of income used just to survive is lower; if I earn $10,000/year and have to spend $7,000 on my rent, car, and food, but you earn $50,000/year and spend just $14,000 on your rent, car, and food, at a nominal tax rate of 30% on sales, my effective tax rate would be ($8000*.3/$10000=) 24% and yours would be ($16000*.3/$50000=) 9.6%. The situation would lead to concentration of wealth [10], because at the end of the year, I would have but $900 to invest, whereas you would have $31,800.
So where does this leave our mythical rich man drinking with his poorer buddies? Pretty much where they were in the first place. If we assume that the primary purpose of taxation is to fund the government (which protects rich as well as poor) and that the secondary purpose is to encourage the creation of wealth, then here's the way the piece should have been written:
JohnSuppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
So, that's what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men"”the paying customers? How could they divide the $20 windfall so that everyone would get his fair share?
They decided that "fair share" meant changing the amount so that most of them had the chance to save up more and become rich. So, the bar owner came up with the new payment plan. And so:
Each of the six was better off than before. And the first four continued to drink for free. Once outside the bar, the men began to compare their savings.The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $1 instead of $3 (67% savings).
The seventh now pay $3 instead of $7 (57% savings).
The eighth now paid $7 instead of $12 (42% savings).
The ninth now paid $15 instead of $18 (17% savings).
The tenth now paid $54 instead of $59 (8% savings)."What should I do with my extra money?" asked the sixth man.
"Yeah, that's a good question!" exclaimed the fifth man. "I've got an extra couple of bucks "“ what should I do?"
"Save it" advised the tenth man. So they all saved their extra money for a month, then went and spent it on another round of beer. As a result, the bar tender was able to make more profit, which allowed him to lower his prices further. And the men were able to drink more often for less money. And that made everyone very happy indeed.
[2] Many people confuse the deficit (how much the annual budget lacks) with the national debt (the total of all deficits and surpluses over time). They claim that because a deficit can have good effects, such as stimulating the economy through increased government spending as the New Deal did, a debt must also be good. What they miss is that a series of deficits can create a debt so large that no country can get out of it [a], crippling the very stimulus that it created in the first place.
[3] If you are truly interested in the questions of the economics of taxes, there is abundant literature in the field on the topic. Happy reading!
[4] You may be aware of the annual "tax challenge" where trained tax preparers, people who fill out these forms for a living, are asked to fill out the taxes for a hypothetical family. These agents typically have results that can vary by as much as $2000. If even the professional players can't figure out the rules of the game, isn't it time to simplify it?
[5] Should we subsidize hybrid cars? What about hummers? Or charities? These special deductions are where the society shaping aspect of taxes becomes most obvious.
[6] If you earn $100,000 at your job, it is taxed at 28%. If you get $100,000 in dividends, it is taxed at 15%. If you get $100,000 in capital gains, it is taxed at 15% unless it is from the sale of property (25%), the sale of small business stock (28%), or the sale of collectibles (28%). Are you confused yet?
[7] The original rationale for this was to encourage people to invest in long-term projects. Now it encourages businesses to churn their stock so that they can take the 15% tax rate instead of the 28%.
[8] Yes, the other side is that government spending should decrease so that there is no annual deficit except in economic emergencies. But, given the way that Congress is set up, there is no way that will ever happen "“ pork is too much fun and too good a way of ensuring re-election for it to ever end.
[9] Though if anyone expects that simplicity to last beyond the first session of Congress, they should put down their joint right now.
[10] Concentration of wealth is generally considered to be a bad thing economically speaking because it reduces the opportunities to generate new wealth. Socially, it is a bad thing as it creates a more rigid class system (think Irish farmers and English landlords, or Southern sharecroppers and landowners), which stifles innovation and invention.
[a] Countries cannot declare bankruptcy under modern international law. Nor can they claim that they are not responsible for the acts of previous rulers, even if the previous ruler was a dictator thrown out by a popular uprising. The bankers want their money and they don't care who pays.
