Tuesday, July 24, 2012


The Bush tax cuts of 2001 and 2003 lowered the marginal income tax rates for all citizens of the US. Marginal means the amount you pay on each “segment” or “bracket” of your income. On the very lowest segment of income, an amount that depends on various factors such as if you are married and how many children you have, you pay zero taxes. On the next lower segment of income you have, you pay the lowest marginal rate. If your earnings increase through each bracket, (again depending on factors mentioned) you pay a larger percentage on the amount above the previous bracket.

And so on. The top bracket is $388,351 for an average family. So it is complicated, and your total tax is a sum of the various marginal rates on each segment or bracket of you total income. This is called a progressive tax and basically people with larger incomes pay a higher percentage of that income in taxes. The more you earn, the more you pay, at least on the amount over the last bracket.

This is income from wages. Income from investments has a different tax scale depending on things like how long you held the investment. (The Bush Tax Cuts cut these investment tax rates too.) Finally, of course, there are all kinds of deductions to reduce your taxed income. For example, you get to deduct from you gross income money spent on mortgage loan interest and local taxes. There are also tax credits that reduce your total taxes for things like job training and college tuition. All these deductions and exemptions make taxes very complicated. Let’s try to keep it simple.

Here are the marginal rates both BEFORE the 2001 “Bush Tax Cuts” and CURRENTLY for each income bracket. (Income below $17,401 is not taxed.) These incomes are "taxable incomes" which means after deducting for certain expenses such as mortgage interest and after exemptions for the number of children, etc.

     Income    Before  Current
    $17,401     15%      10%
    $70,701     28%      15%
   $142,701     31%      28%
   $217,451     36%      33%
   $388,351     39.6%    35%

One reason to be aware of these numbers is that the extensions to the Bush Cuts end on Dec. 31 of this year. Without congressional action, we will return to the "before" marginal rates. There is a lot of discussion about extending the cuts. The midst of a recession seems to most economists as a very bad time to raise taxes. There is also a great debate about the rich not paying their fair share. We all have a serious problem with making ends meet. We are currently spending more on the federal level – a lot more – than we are making from revenues such as income tax. That is called deficit spending and so the federal government is borrowing money to make up the difference. Many would like to see this borrowing end or at least be reduced and get the budget back in balance or closer to a balance.

There are really only two ways to do that: cut federal spending or increase federal revenue. Of course, both could be done, and that would have a greater effect than just trying to balance on one end of the expense / revenue equation. Since income taxes are the largest single revenue source to the federal government, it is at the center of these discussions.

Suppose we restored all tax rates to their 2000 level – pre the Bush Cuts. That would produce something like an additional $243 billion in annual revenue according to reliable sources such as the Congressional Budget Office. Estimates do vary because a change in tax rates will change spending habits and have an effect on the overall economy, but these are good figures for discussion. For comparison, the US deficit in 2011 was around $1,300 billion. So compare the increased revenue of letting all the Bush Tax Cuts expire of $243 billion, and you can see there is still a ways to go to balance the budget.

OK, times are tough and this is no time to raise taxes on those who barely can make a living, so why don’t we just tax the rich? OK, what is rich?

Let’s assume that is anyone who makes over $1,000,000 a year. Most would call those people “Millionaires.” Most people would consider that a very good income. If we restore the pre Bush Cuts rate to all families that make over $1,000,000 a year then the resulting revenue would only increase by $28 billion. A lot less than the $243 billion the total Bush Cuts are costing the US Treasury.

Well, let’s lower the bar a little. Suppose we use Obama’s number. He says he would raise taxes only on those that make over $250,000 a year. Restore the pre Bush Cuts at that level and the extra revenue will be $40 billion. Now every little bit helps and $40 billion is a lot of money, but it is not much compared to $243 billion.

You see, in this country, it is still the middle class that is the financial king of the hill. Don’t count the poor. They are not paying any income tax at all either before or after the Bush Tax Cuts. Of course, they are paying other taxes such as Social Security and Medicare taxes as well as property and sales tax, but the Bush Cuts are all about income tax. 

And, of course, the rich may have access to more tax savings and other deductions, although the best tax deduction may be having a large family with lots of kids. We could find a lot of additional revenue if we dug into the overly complicated tax code and started whittling away the special benefits hand crafted for certain groups … but then we’ve always used tax policy to encourage other policy aims such as home ownership … so that is a real complicated solution. If we can’t agree how to fix the most basic tax rates, how are we going to make changes to the volumes of special tax rules that get enacted every year. What about the petroleum depletion allowance? I didn’t know petroleum got an allowance.  :-)

I’m not arguing a particular side or course of action. I think we should consider both the fiscal and societal issues around taxes rates and brackets and tax cuts and tax policy. I’m just pointing out that taxes are very complicated and that the amount of revenue lost due to tax cuts is something we should consider carefully.

While it sounds good to say “tax the rich.” After all, everyone loves a tax that someone else has to pay and they don’t.  And, there are real issues of fairness and benefits from taxes. But I see a lot of slogans thrown around, and little hard mathematics in these discussions. I know most US citizens are more afraid of math than of spiders, and innumeracy is a bigger problem in the US than illiteracy. So, as a person who can actually add two and two and get the correct answer (four), I’m looking for more numbers in the debate.

For those clamoring to “just raise the taxes on the rich,” I’m here to tell you that that will not make a lot of difference to the federal budget. It might be the fair thing to do, and it might not hurt the people who are struggling during this financial crisis, but the numbers just aren’t there. I know that the highest bracket was 90% during Eisenhower’s time in office, but I don’t see how you can say it is fair to take 90% of what someone is earning just because you think they earn too much. If you want to make the “fairness” argument, you have to be fair to both the rich and the poor.

Just to be sure that I'm clear, let me say this. I do not oppose raising taxes on the "rich." Restoring the top bracket to the pre-Bush level is fine with me. They can afford it and every little bit of extra revenue will help balance the budget. And I doubt that that small raise will have any adverse affect on our economy. I am simply stating that that alone won't solve the problem. Some act like raising the taxes on the rich would solve all our fiscal problems. It won't. The amount of extra revenue from restoring the original tax rate to the top bracket is very small relative to the size of the annual deficit. It will take a lot more. It won't be easy. Stop thinking in slogans and examine the numbers.

We are approaching a time when several different tax cuts are due to expire … not just the Bush Cuts, but many others too including the last two year’s reduction in the employee portion of the social security payroll tax. I for one think the current fiscal situation is non sustainable and we are spending money our children and grand children will have to repay. I look at the fiscal crisis of the week somewhere in Europe, be it Spain or Greece or Ireland or wherever, and I see the future of the US. If you think the European debt crisis is bad, wait until the US national debt is declared to be junk bonds.

I think we must make some very important decisions in the next few months, and it is congress that will make most of those decisions. We the people have an obligation to educate ourselves … including understanding the numbers. That is the point I’m making.

If we continue on this road of deficit spending there will be a crisis. We have to balance our expenses and revenue. The government is no different than the family when it comes to budgets. You must live within your means and use borrowing intelligently.

If we don’t make some changes soon, it will be time to plant gardens in the back yard for food and get out the kerosene lanterns. Life, as we know it, will end. Just sayin’.

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