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Your Take: Bush Era Income Tax Cuts
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Despite what you feel about President Obama, you have to appreciate the sheer amount of work he’s managed to get Congress to do in the few years he’s been in office. Whether or not they’re the right things to do will remain to be seen, but one topic that is sure to take center stage within the next few months, if not weeks, is what we should be doing about the soon-to-be expiring Bush-era tax cuts.
A little history for those of us who weren’t paying taxes before 2001 (that includes myself, at least on any meaningful level). President Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001 and made one of the largest tax cuts we’ve seen in quite some time. Among other things, the EGTRRA (quite an acronym) lowered every tax bracket, lowered capital gains tax, and effectively lowered the tax burden on every single American. If you remember, this was the boom years of the Internet dot-coms and the economy was doing great. As a way to make the debt and deficit math look more palatable, the cuts were given a sunset provision of December 31st, 2010.
There is no question that the “rich” benefited the most from these tax cuts. Lowering the 36% bracket to 33% does far more than lowering the 28% to 25%, it’s just how the math of tax brackets work.
December 31st, 2010 is not too far away and the debate is growing louder by the day as the November mid-term elections draw closer. Some Democrats and President Obama would like to continue the tax cuts for the lowest four brackets while letting the top two return to 2001 levels. Republicans would like to keep the cuts as they are.
I personally think that raising the top two and maintaining the bottom floor, as I tried to predict for 2011 tax brackets makes the most sense. I think that if you earn $250,000 or more, you aren’t significantly impacted by increasing your taxes a few percentage points. Since I have an understanding of how taxes work for small businesses, I can assure you that this will not affect small business because that tax is on profits, not income (you deduct expenses from income to arrive at profit, or loss). All that talk about how this will kill small business is inaccurate.
The one thing that seems to be overlooked is the fact that keeping the cuts will cost us $3.8 trillion over ten years, with $700 billion of that attributable to cuts for the top 2% of income earners. 18.4% of the cost will benefit 2% of earners… 2% that don’t need it. I’m not a class warfare type of guy but let’s take a page from Warren Buffet, one of the richest people in the world.
Update: Here’s a graphic comparing the two tax proposals.
I’m curious about what you think, should we let it all sunset? Partially? Keep it as is? Dump it for a flat tax? Let’s hear it!
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Jim – You are VERY wrong about the fact that raising the taxes will not affect small businesses. If you have an S-Corp, the profits are distributed amongst the shareholders according to % ownership and you have to report them on your personal tax return and pay the taxes at your tax rate. Therefore, if you are a business owner making more than 250K, you will be affected greatly. Its not like these distributions are taxed at a flat rate like the capital gains tax…they are added onto your income. Most of the time, the business owner doesn’t even see this money. It is put right back into the business to be used as working capital.
I work for a family business that is an S-Corp. Although I am a minority shareholder (7%), my 1040 reflects a much higher income than I actually bring home. My dad and mom, who own 62% of the business are going to be greatly affected by this.
I can’t speak for a C-Corp or someone who files a schedule C but it definitely will affect the S-Corps.
People have argued this will hurt small business and in your example, which I agree with, it doesn’t hurt the business. It hurts the income of the small business owner, it doesn’t stop him or her from investing in their business if they choose to. In fact, it acts as an incentive to invest because you get to keep less of what you earn in revenue and entices you to grow the value of the business because when you sell it the proceeds are taxed as long term capital gains (assuming the business has been around 1+ years).
I don’t know how your family business operates but your business chooses to recover the profits. I don’t know how many businesses operate that way.
“In fact, it acts as an incentive to invest because you get to keep less of what you earn”
Whoa!?!?!?!
I think Jim meant that you wouldn’t pay taxes on what you earned, because it was reinvested, not taken as income.
I didn’t say it was a good thing but it does act as an incentive.
Jim, I couldn’t disagree with you more.
The reality is that small businesses use retained earnings (profits) as a basis on which to make risk decisions for hiring.
Let’s say in year 1 of running a business you make $1,000,000. You “Bank” all of this money as profit.
In Year two you plan to use the money to invest in your business by hiring people. A difference in tax rate between 35% and 39% on this $1,000,000 in profits is $40,000 in taxes, or the average middle-american salary for one additional person.
The taxes being taken out of profits robs the business of reinvestment funds, which is the engine of job creation. The hiring decision for a business is a complex risk decision that is not only based on future potential earnings, but is heavily predicated on how much investment capital is available.
This is even MORE true in product-development companies where revenues may be delayed years from the time the investment in staff is made. That investment in staff MUST come from PROFITS that are subject to tax.
I have to add one more point after reading through all the comments here.
Most people who are not entrepreneurs and business owners have NO concept of taking profits and reinvesting them in PEOPLE who will in turn develop appealing products and services that subsequently drive consumer spending.
When the Government takes money out of the economy to meet its own objectives, that may be an OK goal. But to assume that the Government is generally BETTER at getting consumer spending to increase than the ingenuity of private businesses to offers appealing goods and services is just naive. It’s the very reason that centrally-planned economies fail.
The reason is because the “bright ideas” of our few political leaders simply CANNOT compete with the hundreds of thousands of individual Americans who are dreaming up ideas for “the next big thing.” In some rare cases, the Government gets an investment right, and potentially better than the private sector. But by and large, it just doesn’t.
Lynda and Fred are absolutely right.
S-Corps and partnerships make the majority of profits and employ the majority of workers among small businesses. Unlike large corporations, the profits flow through to the owners’ 1040s (even though the money is probably still retained in the business) who then pay taxes based upon their own personal tax rates. I’m part of a family-owned business and associate with a lot of entrepreneurs, so I know how this works all too well.
Especially in today’s tight lending environment, retained earnings in a small business are generally the only form of capital that can be accessed to hire employees, innovate and grow the business. This increased tax will most certainly reduce retained earnings and hurt job growth by penalizing the most successful of small businesses. A real bummer, since I thought our main goal was to try to create more jobs in this country!
Let me get this straight, the only thing that determines hiring new workers is your tax rate? So if you sell thing a ma bobs, and there is a fad explosion for them, where the demand is skyrocketing, if the tax rate isn’t to your liking or comfort level, you’re not about to hire any new workers, even to keep up with demand? Hmm, that sounds a lot like the typical idiocy that our business world wants the public to believe all the time, and worse so many do. How in the world did business survive at all prior to Bush’s tax cut’s? Evidently very well because there have always been wealthy people. Business taxes are lower now than they’ve ever been and it sure isn’t and hasn’t spurred job growth or our economy, it’s just helped the rich become more so.
What ever happened to good old supply and demand. Workers cost X amount of dollars, expenses cost Y amount of dollars, you pay it and deal with it like everyday people do with all their bills and expenses. To business people, they should be able to charge everyone as much as they like, while they shouldn’t have to pay anything at all themselves. As dream world as that sounds, sadly our bought and paid for government has been allowing them to do that very well. Can you say global economy? Our economy has always been a global economy, we’ve always participated in international commerce. The difference now is, global economy, is a buzz word to define eliminating the US worker from the loop. You have a US company, selling to US consumers (the ones that are left), yet the company shouldn’t have to pay the US labor rate. A US labor rate that keeps our government sufficiently funded to handle expenses. Outsourcing of jobs destroys our consumer base and even worse our tax base all for the benefit of the wealthy who surely don’t want to make up the difference.
Frankly as far as I’m concerned we lived with those tax rates before Bush’s cuts, let them all expire for everyone, then the wealthy 1% have no where to hide. And as far as damaging our economy, it’s already damaged thanks to all the business coddling that hasn’t done anything to help the everyday worker or country. The rich get richer and don’t want to pay anymore taxes and the everyday working person makes less and less and can’t afford to.
Yes, there are plenty who question that the rich benefited most, if you haven’t heard anything else, then you need to get out a bit more
(hints: 15% -> 10%, the child tax credit)
The tax cuts also won’t cost us a dime. If you get a pay cut, does it make your expenses go up by that amount? No, everyone on a personal finance blog would call you out for saying such a ridiculous thing. Revenue is different than spending. The solution to a revenue/pay cut is to spend less. I would think a pf blogger would know this….
And I’m with Lynda on the business taxes, you seem to have a very limited view. Is your business just the blog? Any employees? If so, do you pay for their health insurance? Do you plan on growing and expanding? Hiring? How would those things change if your expenses went up?
I would agree in a normal economic environment but right now we’re in a period where no one is spending because people are fearful of the future. If the government doesn’t step in, we will experience this period for much longer. Whether or not you believe it’s the right thing is up to you but that’s the economic reality.
Tax cuts won’t cost us a dime directly but it’s hard to project how it affects the economy.
I have no employees, I don’t pay for health insurance, and that’s because I don’t need to. My personal experience may be limited but I understand how taxes work. If my expenses were to go up, that has nothing to do with the tax rates. I don’t understand your point.
Research contradicts this though: http://tinyurl.com/6q2rzu
“After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.”
It’s an interesting read so I don’t want to quote too much of it. And of course, we’re doing the exact same thing now – government stimulus, and it’s not working. Cut taxes, cut spending and the economy will recover, and then revenues will recover too.
That study has been widely discredited. Not saying that it’s wrong, but that you can’t take it as fact just because FOX highlighted the study. Gotta remember that the media has an agenda, folks….
I am, however, biased. I don’t think that there is ANY way that we get out of the GD without all the govt. spending that occured via The New Deal and continued with WWII.
You say that cutting spending and taxing is the answer…? To get out of the depression, you need people to spend money again. Where is that demand coming from if unemployment is high and public sentiment is negative towards future prospects? Same as the current situation, you need the Federal Govt. to come in a “buyer of last resort.” Even the last administration saw that simple truth.
IMO, as bad as some are making it out to be, the current situation would be WORSE if the govt. didn’t do what it had done.
If you have studies discrediting it, you should link them to give people the entire picture.
Just my common sense – you take money out of the economy through taxation, run it through the government bureaucracy and then put it out back in the economy? That’s not going to be as effective as removing the bureaucracy and letting the economy work. Adding overhead will not improve efficiency.
We get the economy back on track, government revenues recover. I’m not against some government programs designed to help those out of work (though I’d argue that the policy of paying people for longer and longer not to work is lengthening unemployment), but I can’t say it’s for the reason of getting the economy back. There is a trade-off on that, and at some level of providing a safety net is good.
PS. I don’t see how the appeal to the last administration would sway me, I pretty much opposed Bush on his domestic policy. Obama, sadly, is giving us more of the same on steroids.
I agree. Without the government spending money, we would have been much worse off.
Also, cutting government programs may save some money, but that would increase unemployment (taking away some government revenue), and decrease buying power, hurting private business further. (This is a simplified way of putting it.) With consumerism being a large part of our economy, I don’t see this as being a great option. That’s not to say that all government jobs are worth keeping, or that some people should be getting paid what they do for their work.
Cutting government spending doesn’t necessarily lead to more unemployment. It just leads to fewer public sector jobs and more private sector jobs.
How do you come to that conclusion? Cutting govt. spending => more private sector jobs?
There are many factors that come into play here. Higher government spending requires higher taxes (eventually), which lead private employers to cut back in order to remain profitable. In the end it is a zero sum game, or we go bankrupt as a nation.
In addition, there are areas where the public sector competes with the private sector. For instance, by cutting postal expenses, Fed Ex and UPS will likely need to hire more people to take on their increased share of the demand.
Not sure I buy this. That, and your example isn’t a terribly good one. The demand for shipping, like most things, trends towards being inelastic. Even if the price of shipping were to go down, it’s not like people would all of a sudden start shipping more things. It’s lunacy to suggest otherwise. Maybe just a bad example, but that’s the one you used….
“Lunacy” was too strong a word to use there. I should have said that the suggestion was “mis-guided.” My apologies.
Exactly my point. People would start shipping more things through UPS and Fed Ex because the US wouldn’t be subsidizing the Postal Service to ship those same packages.
Problem is that the government needs to step in in areas where profitability isn’t appealing enough to private business. There’s a reason that UPS and Fedex do packages and quick-send mail, and not the delivery of credit cards statements, etc. Similar to why private business will not run transportation, such as bus systems and subway systems, they’re just not profitable. But we need these assets.
Jim, you are simply ignoring the fact that profits are the basis for investment in new product and service development, and that this investment is what drives job creation in the economy.
Nobody argues that the Government needs to tax to provide necessary services, but the idea that government spending is going to have a GREATER impact on the economy than private enterprises allocating capital to new jobs that drive future products is simply political propaganda.
You seem to accept as gospel the administration’s arguments for “stimulus” investing, while ignoring the normal investment cycle for businesses.
Problem is, in a “normal” business cycle, businesses are loathe to invest when there is a contraction/recession/depression. Rather, they tend to tighten their belts. Drops in unemployment and consumer confidence being a couple of reasons. It’s in cases like these that the govt. has to step in and be that “consumer of last resort,” to make sure economic activity doesn’t grind to a halt, to give businesses the belief that their products/services will have a market.
Nate,
What you are suggesting just doesn’t really work in real life, at least not the way I assume you are presenting it. If it did, centrally-planned economies that allocate resources by Government fiat would, on the whole, outperform capitalist systems, especially during downturns. But they never do. In fact, such systems perform the WORST in world economic downturns, despite the best efforts of the so-called geniuses who are in charge.
At best, stimulus packages that are predicated on Government’s allocating resources have a short-lived psychological effect on the market, making people believe that the Government can solve the problem through spending. At worst, they don’t even provide this. The problem is that the Government allocates resources very POORLY compared to the independent business.
For example, if the Government’s motivation is to “put people to work”, they might decide to re-pave all the major highways in the area. Certainly it’s nice to drive on repaved highways, but the question is: was the cost of paving worth it? If the motivation is to “stimulate the economy”, that answer is based more on workers taking home paychecks than on whether the new pavement has an overall net positive economic impact on the community.
Sometimes, paving a road DOES have a net positive economic impact. Perhaps it attracts more people to live in an area, reduces maintenance on cars, reduces traffic wrecks, etc. But, if the goal is stimulus, all of these benefits are usually just “assumed” rather than really tested. Paving is just one example of this phenomenon.
If you want to really create stimulus, put the spending and investment decisions in the hands of the people. One option for spending that $1 trillion stimulus Obama pushed through would have been to eliminate FICA taxes on employees. It would have cost the same and it would have put REAL money into the pockets of the poorest Americans in a disproportionate manner. Those people could have then allocated the resources the way that made sense for them, and companies would have really had the ability to serve products that met their needs.
I think the biggest issue is the short term nature of the solution, which only does what you say – boost morale. If someone is out of work because they no longer lack relevant skills, they need retraining and not a short term job paving a road. They’ll take it because it pays but afterwards you’ve only given the guy a fish, not taught him how to fish.
I think eliminating FICA would be more direct but that’s taxing a system that’s already in dire straits, despite what the projections are after the health care bill. The problem is that’s another short term solution to boost spending, much like unemployment benefits.
I think we need tax cuts for growth industries, like renewable energy, so that they find a home here and not abroad (and by abroad I mean China, who has no choice but to invest in it due to sheer population). All the rest of this stuff is shuffling deck chairs.
I like this post.
The fact of the matter is that the US is going broke and must 1) raise taxes and 2) cut spending.
There is no getting around the obvious.
Bill Snider
Hard to argue with that. And I love this post too.
I would turn the answer around, 1) stop spending like a druken sailor & 2) stop spending like a druken sailor. Both and all parties. If your revenues (incomes for us) go down, you need to shrink your budget (eat less meat for us)…how can you have any pudding???
This, my friend, is obvious…
Jim, I think this might have been a reply to me up above but it bumped to here…
I think a system that allows businesses to commit money from this year’s profits to next year’s hiring (and avoid taxes) would be a novel idea… something that basically allows you to shield income that will go to putting people to work in the future. I haven’t really thought this out but I think that would alleviate much of the argument about slowing the small business engine of growth by increasing taxes. I am 100% OK with raising taxes on rich individuals to reduce their consumption – at least from 35% to 39%. But, I would like to protect income that is likely to go into business reinvestment.
In terms of tax cuts for certain industries, I’d have to think more on that. I’m generally against the Government making capital allocations in the private sector unless there is overwhelming evidence that it’s a good idea (I think public education falls into this boat). Cutting taxes for select industries does encourage growth in those industries, but I guess its tough to say whether it’s better to let the market decide which industries should grow. If we were to support something like renewable energy with tax breaks, I would think a good justification would be environmental concerns, where RE offers far fewer negative externalities than fossil fuel-based energy solutions.
Really great point Jim. We need to start looking at investing more money into renewable energy sources to eventually bring down the cost of energy. The only way that the public is going to accept these different sources of energy is they somehow make their energy bills cheaper every month. If more research is done, we can make all of the major renewable energy sources (wind, solar, geothermal) much more efficient and eventually way cheaper than coal and oil. The only way these companies are going to do more research is by selling more of their current products and getting more tax breaks or incentives from the government.
I don’t look at the purpose of alternative energy sources as bringing down energy costs. I look at them as replacing the current sources once they are depleted.
Lower costs will not be the result. It is survival, pure and simple.
Bill Snider
Lower costs in the short-term probably won’t be the result, but in the long-term as developing countries use more and more resources, the costs of renewables will decrease (meaning a wind field now may seem expensive, but in 15 years, if its kept in good condition, it’ll probably be cheap).
I would hope that we don’t wait until coal and oil are depleted before we begin to move towards renewable energy. I would guess that renewable energy will go down in price and will replace them in the process. The most expensive part right now is R&D, initial setup cost and expanding infrastructure. Once the grid has been setup better to be able to transport renewable sources, a drop in price should soon follow. Whether energy companies decide to jack the prices up even though it’s not costing them much to get energy from those sources is a different story.
Have you ever seen an industry cut the prices of a service or goods when the consumers were used to paying at a higher rate? I doubt the cost of renewable energy will go down- the businesses will just pocket the differences once the initial expenditure has been paid off.
Yes, it happens all the time. It happens as often as it doesn’t.
The price of a gallon of milk is unchanged in constant dollars since the 1970s. Dairies aren’t doing this just to be nice: it’s something called the market-clearing price. Pens and other office supplies are practically free compared to where they were a generation ago.
Clothes, bottom-end electronics, you name it. If you don’t believe me, read bit.ly/byzj9J
Taymee, producers aren’t there to screw you. Quite the opposite, in fact. Thomas Sowell has a fantastic, easy-to-read book, Basic Economics, that explains this.
Taymee – Have you prices a flat TV recently? Or Hard Drive for your computer? I just threw out a 3GB drive. Paid $300 for it. $100/GB wow. 2TB drives are now seeing sales for about $90 4.5 cents per GB.
I love to see charts that price things in median wage hours. In other words, a car in 1970 cost X hours median wage then, and Y hours median wage now. That kind of thing. To be fair, many things exceed inflation, but many drop.
Free markets do work…deflation mostly applies to technology due to advances costing only a little more.
I would imagine we’d pay different prices for the same product if government was involved…oh wait, we have the postal system… email, bill pay online, less advertisments mailed…we need to increase the costs to pay for our employees to deliver less mail…
Well, that’s exactly the point… Using your example, the take-home pay of those pavers is EXACTLY the outcome you are looking for. They go home and then spend the money…stimulating the economy. Sure, you lose a proportion of the money along the way due to red tape and whatever savings rates might exist, but it’s better than nothing, which is what the government fills in its role as “spender of last resort.”
You refer to other examples where spending governments don’t perform as well in downturns as governments that don’t (spend). Can you provide some examples?
I’m a huge conservative, but I can still see that the rich benefited “more” from the tax breaks. Sure, the folks in the lower tax brakets got “more” in terms of a percentage break, but come on – if you have a salary of $1,000,000/year and they reduce your tax bracket 3%, you pocket and extra $30,000. If you make $25,000/year and your tax bracket is reduced to ZERO, you still wouldn’t benefit “more” on a purely quantitative level…
Jim’s argument was that no one disputed there was more benefit to the rich. It was a poor assertion.
Dave – half of the taxpayers pay no tax at all.
Whatever benefits they receive from the federal government are at the expense of those paying tax above the average.
When you adjust the tax rate of the guy making $10M/yr, even 1% is going to be $100K. Up or down.
I suggest you google for a story titled Bar Stool Economics and let me know your thoughts.
We can tax that rich guy 100% on income over $100K, and get zero taxes from him, as he’d stop working. Killing the goose I suppose.
> Whatever benefits they receive from the federal government are at the expense of those paying tax above the average. Tax Favored Status for Non-Wage Income.”
A lot of those people paying less than ‘Average’ due to things like *Tax Favored Status for Non-Wage Income*, *No Tax On Chushy Employee Benefits*, *Deferrals and Deductions Using Retirement Plans*. These tax advantages usually offer bigger breaks the higher above the Median US Income ($44,389 ).
> We can tax that rich guy 100% on income over $100K, and get zero taxes from him, as he’d stop working. Killing the goose I suppose.
?? That would not kill any geese. Instead companies would stop paying income over $100K, and instead spend money that would be salary to invest in more hardware/production equipment, or hire another employee.
I’m most appalled by the fact that the Republicans want allow tax breaks for the 98% people (< $250K) unless the top 1% also received the break. This is the most disgusting thing.
Dems are also spine less. They can have a new bill that only keeps and tax break for people making less than $250,000 and force the Repubs to vote yes/no on that only. Let's see what they do.
It’s my understanding that the income of the small business owner (S-Corp) is the net profit of the company. Is that not the case?
Also, why does Obama keep touting middle class tax cuts? It seems that until you reach $200K, the tax proposals are almost exactly the same.
I say dump it all for a flat tax.
You are correct, income to the owner(s) is profit from the company.
It’s technically a cut because you’re passing a low that lowers income tax rates in 2011 (which would go back to pre-2001 levels), it’s not a cut from 2010 to 2011 as much as it is a cut from current 2011 levels to potentially cut 2011 levels.
A flat tax is a big tax cut for the rich. That’s while you’ll always hear “flat tax” rather than “tax simplification” from the right. A tax law with 100 tax brackets and NO deductions or exemptions would be simpler than a flat tax rate with our current deductions and exemptions code. Flat tax proposals invariably get rid of capital gains taxes and inheritance taxes which affect the rich much more than the poor or middle class.
By the way, if our country is supposed to be a meritocracy, what possible reason could there be for LOWERING inheritance (or death) taxes? The rich are always talking about how the poor should stand on their own two feet, but they have no problem giving their own kids multi-million dollar stilts (in addition to the best health care, and education money can buy).
Tax increases are needed. It’s as simple as that. Politicians must have the courage to raise them – as they also cut spending.
Yes, allow the Bush tax cuts to expire. It was a campaign pledge.
On a personal finance blog, I’m deeply disappointed. If this was an individual who was seeing expenses outpace income, you’d tell them to shape up and cut costs.
Why do we let the Government do things we personally would not do? The tax cuts may need to expire, but we also NEED TO CUT SPENDING!! Entitlements that are enacted today are payed for with tomorrow’s tax revenue, if any exists. That’s the whole nature of borrowing money.
Neither a borrower or lender be!!
On another personal finance blog, maybe they’d tell people to shape up and cut costs, I personally don’t feel like I’m in a position to tell others what to do.
(but I get your point)
If you follow Ramit Sethi, he’d tell you to increase your income.
Most pf blogs I look at mention cutting costs but realize that there is only so much you can reasonably cut, and increasing income has to be part of the strategy.
The government is very different from an individual. They can cut budgets and layoff people, which lowers govt revenue and decreases the spending power of consumers, further hurting many businesses. If an individual cuts their budget, the impact can not be compared to if the government does.
Of course individuals can cut budgets and stop eating out and shopping, which leads to restaurants and stores laying people off, which decreases the spending power of consumers, further hurting many businesses.
It just seems different because the government has gotten so large. Are you suggesting that we should tell individuals to cut their budgets, but only if most people continue to spend beyond their means?
I think the comparison can’t be made with a straight face. An individual, even a handful, cutting their dining out budget would has an impact, but one store couldn’t say “those people that cut their budget, fred, frank and joe, are putting me out of business.” On the other hand, cuts by the government would be impact thousands, hundreds of thousands, or millions, which would have a much greater impact on everything overall.
But small businesses were doing great during the Clinton era with higher tax brackets.
Let’s take an average case scenario to debunk the job killing myth propaganda of the Repubs.
Lynda’s father makes a profit of 1.1 million and gets a tax break of 100K under the current plan (the Bush plan). Under the proposed Dem plan, he will get a tax break of 6.3K a whooping 94K difference)
Lynda’s father uses an extra person and reduces his profit to less than 1 million after paying for the wages, FICA, insurance etc. Now his tax break under the current plan (Bush Plan) is 17K and under the proposed Dem plan it is 6.7K.
So, the Dem plan does not have any impact whether he hires or not. But Repub plan makes it more attractive not to hire and keep his whooping 94K that he can spend it on his European Vacation.
Repubs are telling this big lies for decades.
If you don’t believe me, read a Reagan insider’s opinion here. The same person who engineered the Reagen tax cut and advocated Supply side economy. At that time it was required because the taxes were too high.
http://www.marketwatch.com/story/reagan-insider-gop-destroyed-us-economy-2010-08-10?pagenumber=1
But the current Repub bunches have taken it to the extreme. And let me explain why.
Repubs are destroying US middle class at the expense of the riches. Why? To establish a Theocracy where middle class will foolishly believe any thing the Repub mullahs are telling them in the name of God.
Repubs want a God fearing middle class that will work hard till they die to make top 1% accumulate disproportionate amount of wealth.
The dooms day are coming. You know why? Not becuase we have lots of debts. Yeas, that is a problem. But it is nothing compared to the ignorance of many American.
In a recent poll, more that 60% people think Obama bailed out the banks, whereas it was started in the Bush’s time and Obama only continued his policy. But most Americans think Obama is the architect of TARP.
The ignorance of majority Americans will destroy this country. They will believe anybody who has the loudest voice.
Yes, small businesses were doing great under Clinton….because the economy was booming and the unemployment rate wasn’t like it is now. When the economy is on fire you can have higher taxes and get away with it. However, just imagine if the taxes were lower during this same period of time…..the economy would have been even better. Don’t forget that the Republicans took over control of the house and senate in 1994 and much of what they pushed through ended up making Clinton look good….economically that is….when it really wasn’t even his doing.
You’re assuming that Lynda’s father hired a new person simply because he had the money to. Anyone that owns a business knows that you don’t hire new people simply because you can. He wouldn’t hire a new person unless his business needed that person to expand and create more profit. Hmmmm, then that’s one less person out of work and more profit for the business owner that’s taking all the risk.
As for Bush being the architect of TARP…you are correct. However, Obama went ahead and tripled Bush’s mistake creating an even larger deficit…..so that’s Obama’s fault.
And if you think the Republicans are telling lies then you must also believe that the Dems are just as bad if not worse.
One of this administration’s biggest problems is that not a one of them has ever owned a business or had to make a payroll. How do you run anything of the magnitude of the US government without this type of experience?
The bottom line is that the government is spending, and wasting, too much money. Get that under control and our taxes would not have to go up.
I have to add to Tom’s point. The problem is with the TIMING of profits and hiring. Taxes occur every year, and so if you make money in year 1, taxes rob the available money for investment in year 2. That’s a REAL problem for small businesses and largely invalidates your point above. Because many small businesses can’t predict revenues and expenses with certainty, they are not willing to hire that extra person in year 1 for the anticipated bigger payoff in year 2.
Fred is it possible that businesses making enough money to “bank” a year’s salary for a new employee to be hired next year should not be S corporations, but another type of corporation (one which would allow more financial flexibility)?
I have no problem with the tax cuts expiring for those making over $250,000. The higher-income earners (most of which can attribute their wealth to the work of those that get paid significantly less) have benefited a lot more from a couple percentage point decrease in taxes than lower-income earners (5% of $25k is nothing compared to 3% of $500k).
We can’t expect our taxes to continue to be so low considering our debt and deficit. And cutting programs only does so much.
I think this is going to be a heated topic!!
I agree with Mark, let them ALL expire and cut spending until we get our deficit under control.
I read somewhere that the top 1% pays more in federal income taxes than the bottom 95% combined. Who is carrying who. I do not have the source, so I may be wrong.
@otiploby Letting the tax cuts expire for the top 2% will have little to no effect on those individuals. It will be much harder on the other 98% of American since the median household income has stagnated because of the recession.
Also letting the all expire and cut spending is not going to help reduce the deficient quickly. The economy is going to have to strengthen before we can feasibly reduce the deficient.And that is not going to happen until consumer confidence and spending increases. And the lower 98% are those consumers.
The problem with the federal government has always been spending not income. The more money you give these jokers the more money they blow. They will spend as much as they think they can get away with. The July 2010 federal deficit of $165B exceeds the entire fiscal year 2007 deficit. Let me write that number out in long hand so you can appreciate it….. $165,000,000,000. Anybody have a savings account or paycheck large enough to cover that bill? Government deficits are sucking the life out of the economy (see The Broken Windows Fallacy). Government policy is scaring businesses and individuals into hoarding their cash, and not hiring workers. The only way out of this mess is to starve the federal leviathan and stop playing Santa Claus with other people’s money.
I think it’s ridiculous that SecDef Gates is trying to cut defense spending and Congress thwarts him, defense is a huge part of our budget.
Gates is cutting spending on the brass but only to reallocate it to the muscle. The overall defense budget will actually still increase. Not that I don’t think that it’s a good idea, but calling it a “cut in defense spending” is misleading.
Biz you examplifies the ignorance of Americans. The biggest chunks of the federal budget are: social security, medicare, and defense. As Jim said, Gates is fighting the congress to try to cut the defense spending, and social security and medicare are spent by the people that receive them. If the feds don’t get tax revenue, they can only borrow money to pay for them, and that will add to the future deficit as we will have to pay interest on that!
“I think that if you earn $250,000 or more, you aren’t significantly impacted by increasing your taxes a few percentage points.”
I couldn’t disagree more. Many people who are making 250k in a two income family have upwards of 100k or 200k of student loans they are trying to pay back. Unfortunately, even though most of the money they earn goes right out the door for student loans, they cannot deduct any of the money because those deductions are phased out for the “rich”.
Higher taxes on the rich are a huge disincentive to get expensive graduate degrees, as well as getting married to others in your same situation.
I think that we can all find extreme situations where people “need” the income. The reality is that there is a very small percentage of the people who earn $250,000 a year in the first place and while that’s not a good reason to increase their tax burden, it makes it more palatable given our soaring deficit.
Higher taxes are a disincentive to get expensive graduate degrees and the marriage penalty is a disincentive to get married, but people still do. People will still get college degrees with higher taxes (as they did before 2001).
“Higher taxes are a disincentive to get expensive graduate degrees and the marriage penalty is a disincentive to get married, but people still do.”
But that’s part of the reason that we have so many problems with the student loan industry.
Do you have any facts backing up your assertion that “the reality is that there are a very small percentage of the people who earn $250k a year in the first place.” I would bet that a large percentage of people under 40 who make that much money have crushing amounts of student debt.
In 2008, FactCheck.org determined, by asking the Tax Policy Center and their models, that one in 50 households earn more than $250,000. That’s 2% and is what I consider a small percentage. [Source] Whether or not you believe the models is another issue but I don’t think the real figure is going to be 20% (or even 10%).
Unfortunately, we don’t have data to answer your bet but I suspect you may be succumbing to the availability heuristic, only because concrete data isn’t available. (plus, plenty of people earn less than $250,000 and have crushing amounts of student debt)
We also have a lot of divorces, but I don’t think we can blame taxes for that.
I misunderstood you. I thought you were saying a small percentage of the families who earn $250k need it to pay off student debt.
I’m not sure “it only applies” to a small percentage of the population makes it more palatable. I would think the opposite. If everyone is chipping in a small amount, it seems a lot more fair than having a small percentage of the population pay a huge amount.
The latest date from the 2007 survey of consumer finances : Only 12.6% of households in the top 10% of income earners have ANY student loans at all. The median value of their loans was $16k. The Mean value of their loans was $33k.
But that’s the top 10%. I thought we were talking about the top 2%?
I don’t find data specific to the top 2%. Do you have any data at all suggesting that a large % of the top 2% of income earners have really high debt levels?
The top 10% of income earners do not have very high debt levels. Given the #’s for the top 10% its not mathematically possible that any more than 20% of the top 2% would have debt over $100k. But the actual rate is likely much lower.
Furthermore for households with income over $200k there are 1.5M where the head of household was 25-44 years old. So the worst case possible scenario is that no more than 28% of the households making over $200k with people age 25-44 would have loan balances of over $100k and the real % is definitely going to be less.
Are you REALLY not going to get married to someone whom you would otherwise because of all of this? Really?
I have several friends who decided to remain single and just live together because it would cost them about $7,000 a year in taxes if they got married this year alone. That will only go up as the highest tax brackets go up. Paying $30,000 for a wedding doesn’t sound too bad until you realize that it comes with a $10,000 a year fee.
That’s an excellent reason to just live together….if you’re making less than $250k. If you’re making more…? I want to be polite, so I won’t say what that sounds like.
But it only costs you that much if you’re making more than 250k combined, because the tax rates are different for single people until you get to the higher tax brackets.
Making 250k as a family is great and all, but if you’re paying most of it in student loan payments, it does not seem like nearly as much.
By keeping the lower brackets where they are, don’t those that pay in the higher brackets still benefit from them, thus preserving that part of their tax cut? That in allowing the highest brackets to return to their previous levels, those paying in those brackets are only seeing their taxes return on the portion of their income that is subject to those brackets?
I have no problem with the 2% of Americans who can afford it the most keeping a portion of their tax break while the other 98% keep all of it, especially if it avoids fiscal disaster.
RE: Flat Tax…. Extraordinarily regressive. Hope things never get to the point where we try it.
I am curious…how is a flat tax regressive? A consumption tax is regressive but a flat tax is, by definition, flat. If it is either regressive or progressive, it cannot be called a flat tax. When a person making $50K pays 5% in tax and a person making $500K pays 5% in tax, that is flat.
It’s regressive because that 5% that the person who’s earning $50k is going to hit them harder than the 5% the $500k earner is going to hit them. Put to a bit of an extreme, but a realistic one, how do you think someone earning only $10k is going to feel about the $500 they’d have to pay?
A flat tax, in concept, disproportionately affects the poor. It’s name has nothing to do with whether it’s pro/re-gressive. It’s just the name.
It’s not regressive, it’s just not progressive. It’s flat, hence the name.
http://www.merriam-webster.com/dictionary/regressive
You’re forgetting the basic personal deduction that’s an integral part of any “flat tax”* proposal, and is as important as the tax rate itself.
Here’s an example: a standard $20,000 deduction for everyone, 17% on the remainder. That way a guy making $20,001 pays 17¢, and Kobe Bryant pays $4,213,662.50 (on the $24,806,250 he receives from the Lakers, excluding other sources.)
In theory, this idea should have bipartisan support. The only thing the parties would need to reach consensus on would be the numbers; how big a deduction to grant, and how big a rate to charge on the rest. Perhaps Henry Waxman would argue that the numbers should be $0 and 40%, while Ron Paul would prefer $100,000 and 1%; Congress could debate the final numbers for as long as it takes.
But anything’s better than we’ve got now, at least until we see next year’s even more complex tax code.
*I put “flat tax” in quotes because technically the basic personal deduction makes it a diagonal tax, not a flat one.
Well, then, that’s not a flat tax, then, is it? We were talking about two different things….
And while you might have Ron Paul figured out, there is no WAY that Waxman would support 0$ and 40%. It’s not a like a Democract to stop caring for someone after they’ve been born…no matter their socio-economic status.
But THAT…is a different topic!!!
Congress will NEVER do a flat tax. If they would, then they wouldn’t be able to put in all the loopholes for the special interest groups. We wouldn’t need Congress as much….to keep devising more and more complex tax laws that is where we are today.
I fully support a flat tax and voting out every single one of the 535 corrupt idiots in DC!
A flat-rate tax, by definition, is neither progressive or regressive. NateUVM you are forgetting your econ101.
It depends on what you mean by flat tax, there are so many “versions” and some of them are regressive in the sense that they affect lower incomes far more than higher incomes.
A “flat tax,” by definition, is when you tax everybody, independent of income level, at the same percentage. That means that if the tax rate is set at 5%, EVERYBODY pays at 5%. That, again, by definition, is a flat tax. And that type of tax “structure” (if you want to call it that), is regressive.
Now, if you want to start talking about exclusion threshholds and the like, then we can get into a debate about whether THAT tax structure is regressive/progressive/whatever, but THAT, by definition, would NOT be a “flat tax.”
Maybe I’m being a stickler for detail, but I also haven’t forgotten my ECON101. ECON201? Maybe….
Dunno where you took Econ101, but your definition of regressive tax is not a standard one. See this explanation:
http://www.economywatch.com/tax/tax-rate.html
Okay, I see the problem. When you said you questioned my definition of “flat tax,” what you meant to say was that you questioned my definition of, “regressive.”
You are right. In the STRICTEST sense of the meaning of “regressive,” a plain flat tax (with no threshholds, other qualifiers, etc…) is not regressive. It stays the same as the income base increases. Agreed.
However, when people debate the merits of a tax structure and whether it’s progressive or regressive, they tend to use either term in reference to how the tax structure impacts those it’s applied to. Sorry if that was not clear.
In the case of a flat tax, because it disproportionately affects the poor more than it does the wealthy (or, the impact is greater as the income base increases), it is referred to as being regressive, because that is its real effect.
Strictly, by definition, regressive? No. In effect? Yes.
“A central issue in tax reform is always who wins and who loses. Under the flat tax, low-income households would lose because they now pay no income tax and are eligible for a refundable EITC of up to $3,370. Although the flat tax is more progressive than a VAT, it is more regressive than the current system. A flat tax would provide huge gains for high-income households because their marginal tax rate would fall and because they consume less of their income than do low-income households. As a result, if a flat tax were to raise as much revenue as the current system, the tax burden for the middle class would have to rise. Consumption taxes are generally less regressive when viewed over longer periods of time because income changes from year to year, but they would raise tax burdens on lower- and middle-income households over any time frame. (For further discussion, see Gale, Houser, and Scholz 1996 and Gentry and Hubbard 1997).” http://www.taxpolicycenter.org/taxtopics/encyclopedia/Flat-Tax.cfm
Are you crazy? You want the government to take more money out of our pockets so they can just keep spending? What sense does that make, they should just stop spending on whatever they want and tighten their belts, like we have had to going forward.
Letting the tax cuts expire will cause people to spend even less because they will have even less than before. And yet the government will just keep spending our money without giving us anything.
Raising the taxes on those making 250K or more a year, will cause them to stop spending $$, employing other people, starting businesses or helping to fund small businesses.
I’ve not read much on this site before, but I truly think you should keep politics off of a pf site, as well as actually understanding what you are saying (which you do not). I’m not sure how we need to give the government more money that we don’t have, is going to help me get my financial life in order.
@ Darin H. –
The problem is, take away the government, and no one is spending on anything (or, at least, not enough to maintain, nevermind bolster, a flagging economy). At least with government spending, you still have demand. Even if it isn’t dollar-for-dollar due to bureaucratic costs, it’s still better than the alternative.
And I wasn’t trying to sway you with the reference to Bush II. Just an illustration of how, when push comes to shove, even the right will agree with the left on how to combat the forces of economic retraction. After all, those that refuse to learn from the mistakes of the past are doomed to repeat it….
I disagree. The 83% of people who are working and have jobs need confidence that if they spend they aren’t going to be out of their jobs soon. Which is why tax cuts work to stimulate the economy better than govt spending.
We aren’t talking about raising taxes on most of the buying public, though. We’re talking about sunsetting a tax break for only a portion of the money earned by only the most wealthy in the country.
But if we disagree, we disagree. Fair enough.
Facts, as they say, is facts:
1)Federal tax rates are currently about as low as they’ve been in the country’s history.
2)Federal spending is about as high as it’s ever been in this country’s history.
These two points mix together about as well as gasoline and matches.
Taxes will need to increase,for everyone and I think this is slowly bleeding into conscious acceptance for most.
The only question is one of timing.
Agreed. We need to face the facts that taxes suck, but without them nothing works. We need a clearer and more responsible accounting for those taxes we do pay. We need to reorganize and reduce the number of redundant and disfunctional programs and offices. We need to get with the program and realize that budgeting for a deficit defeats the whole idea of having a budget in the first place.
Wow there is a lot to digest in this discussion.
I just passed out reading all of this. It is all theoretical. So keep that in mind.
I would like to see the goverment live within their means and reduce their debt. We will cease as a nation if we don’t.
Bill Snider
We should switch to a fair tax. Check out fairtax.org.
-Scott
I think that the lower rates for people who earn less should stay in place. The tax rate for those who earn more than 250k should go up…its not like they can’t afford it.
It’s easy to talk about cutting gov’t spending but hard to do.
Give it a try:
http://crfb.org/stabilizethedebt/
Discretionary spending is relatively small % of fed budget. If the Bush tax cuts stay, then you’ll need to end both wars, cut programs like Homeland security, oil and farm subsidies, maybe even roll back the mortgage interest hand-out.
We are a country of free-lunchers.
Eh, it’s okay, but it doesn’t let you cut much, it doesn’t even allow you to cut ANY of the discretionary budget!
Let them expire.
For those questioning how increased government spending leads to economic recovery, it’s quite simple. Even if wasteful, they’re paying for resources, either labor or physical which also have to be produced, which creates jobs. Those people with jobs have money to spend. It unquestionably stimulates the economy. No, this is not an endorsement of wasteful gov’t spending, but right now wasteful gov’t spending is better than cutting gov’t spending. Trim the fat when the economy has recovered. Preferably, this gov’t spending wouldn’t be particularly wasteful.
Why should the gov’t spend beyond its means when people should not? Because of the business cycle, something must break the downward slide, and historically stagnating or lowering prices hasn’t served well as a catalyst, and neither has increased business efficiencies. Something has to go against the natural forces of the business cycle to turn it around. That’s where the government must step in.
What bugs me is it seems that a vast majority of people who think reducing the deficit is a major issue only seem to be willing to discuss cutting government spending, not raising taxes on anybody. Raising taxes on the rich likely will not reduce consumer spending significantly, and would help reduce strain on the federal budget. One would think all deficit hawks would support this.
I would like to see them continue the tax cuts for the lowest four brackets and let the top two return to 2001 levels. I believe that would benefit the most people.
It’s very easy for the miliions and millions of americans to vote in politicians to play around with how much other people pay into the system. Everyone should have skin in the game. Everyone should pay some level of taxes. The fact that almost half of americans pay no income tax is ridicoulus.
I don’t have a problem if the tax rates go up to pay down the deficit. What irritates me is the fact that 50% of American’s don’t pay federal tax as others mentioned.
I have a good example of this. I know somebody who makes a decent salary, but not very high. He has a wife, who doesn’t work and a few kids. This last tax season, he ended up getting more money back. His wife could work, but they would raise their tax bracket if they did. It’s what they refer to it as “Not worth it for her to work”. This concept is ridiculous and allows people to freeload when they could very well be working.
I agree with other posters that some form of flat tax should be implemented, just as long as it is not unfair towards the poor.
I’m in one of those ‘not worth it to work’ scenarios. It’s not about being a freeloader- if i work I want to make money. I don’t put my sweat into having less money than I had to start with. For me my tax refund doesn’t change all that much- I go from getting back 4k to 5k depending on whether or not I work, its the 1200 a month in daycare that makes it not worth my time to punch in. Granted not all moms are going to have twins to deal with, but the fact remains:
Until we make childcare affordable we will continue to pay the moms of small children to stay at home and care for them themselves- I would like to see social services cut for all unemployed adults except the disabled EXCEPT to increase the daycare assistance program. If moms can afford to work they pay taxes on that money- and then they spend the money and pay taxes on the things they buy, it’s a win win there.
Historically the economy has been most stable when the government spending was high. I am not an economist, but I do recall that from the two econ classes I HAD to take in college.
Small point of correction — the economy was already heading south when these tax cute were originally introduced. These were intended as “stimulus”. The market had already corrected 20% in June of 2001.
That’s a pretty incindiary statement, right there. There are those here who still think that trickle-down economics works…. (tax cuts for wealthy = job growth, etc…) and that it doesn’t lead to those that are already well off merely taking capital out of the system (i.e. pocketing the money) when the economy needs it to be spent.
As noted the Federal Govt. is good at spening money. Something we need right now.
Keep the the tax cuts. Cut the budget so they will be part of a more balanced budget. Its a disgrace all the deficit spending. We are going 100 mph towards a brick wall. Cut the budget 10% for starters. England’s rethinking their welfare spending they realize the party’s over. the federal govt. says “Let them eat cake”. I prefer pie.
Lookout Greece we’re coming up behind you.
Here is all you need to know: http://www.taxfoundation.org/publications/show/25962.html
The percentage of working people who end up paying zero federal income taxes has been increasing and over 1/3 of workers owe no federal income taxes each year. This year, they estimate a married couple with two children can make up to $50,250 and not pay a single penny in federal income taxes. This is simply absurd and is unsustainable.
Do a thought exercise and ask yourself what happens when >50% of workers pay no federal income taxes yet they get to vote and decide how the federal income taxes collected from the rest is spent?
The sooner we reverse the trend of more and more individuals paying no federal income taxes, the better off we will be. No one questions government spending when they aren’t going to be paying for it. In fact, they will actually support any spending that benefits them in any form no matter what the eventual cost will be because it is other people’s money.
The government can’t spend a dollar to benefit someone without first taking that dollar from someone else via taxes.
Obama proposing to roll back only the top two tiers is a step in the wrong direction.
“This year, they estimate a married couple with two children can make up to $50,250 and not pay a single penny in federal income taxes. This is simply absurd and is unsustainable.”
I dunno. That’s only 2.27x the 2010 poverty level. Seems pretty fair to me. After all, seems like a decent goal to keep more people from falling into poverty…
https://www.cms.gov/MedicaidEligibility/downloads/POV10Combo.pdf
Nate,
In other words: they have 2.27X the resources needed to meet the basic needs (food,shelter, clothing) for healthy living.
Yes, I am aware their life is far from luxurious and they may struggle to make ends meet sometimes, but they have sufficient income for their basic needs and more. So yes, I expect a family in such a situation to pay at least some federal income taxes. And no, paying some federal income taxes is not going to drive them into poverty.
Look, my point is that if the federal government is collecting income taxes to provide services that benefit everyone, then everyone who works and earns more than what their basic needs require should be contributing an appropriate amount to the pot.
Unfortunately we are going in the opposite direction in which fewer and fewer people are contributing to the pot. When you reach the point where the majority of the group do not contribute to the pot, yet they are able to dictate what the pot is spent on, the pot will be mismanaged and spent frivolously.
I would debate the contention that “poverty level” means you have the ability to provide for your “basic needs and more.” That, though, might take us too far off topic….
If $50k makes you able to not pay taxes, there will be many more of these families coming as companies are hiring or future hiring back at lower rates. That means less income tax revenues even if unemployment goes down. They will still get sales tax and SS tax…but not much more.
If people do not have kids, there will be fewer future payers into SS for everyone, so I’m not totally opposed to helping families with children…
I’m only talking from a business standpoint, don’t want to sound too much like a stone cold person…
Nate,
You seem to be having trouble with definitions. When a term such as “poverty threshold” or “regressive” is used, they have a defined meaning. You can’t simply decide on your own what you feel a term means and expect everyone else to accept your definition.
Now, since the poverty threshold is defined as the level at which earning less than this amount would be too little to meet your basic needs, I am very confident in stating that if you make 2.27X this amount, you can meet your basic needs and more.
Perhaps you can argue that the method of calculating this level is flawed, but I doubt the current method would underestimate the “correct” level by a factor of 2.27.
In any case, you seem to be convinced that 2.27X the poverty threshold is still too low of an income to be expected to contribute a single penny to federal income taxes. Humor me and let me know at what level you think it is acceptable to start asking our hypothetical family of four to start contributing. 3X the poverty threshold? 5X? 10X?
@ pmulroy – I’m not trying to change definitions. But I could honestly care less what they are. I care more about what kind of impact they have in the real world.
Take “poverty level,” for instance. I KNOW what it is supposed to mean. Per its definition, it’s SUPPOSED to be the bare level of what is needed to provide a basic lifestyle where necessary needs are met.
But there are criticisms, both ways, on how it’s being calculated. Some say it overstates poverty, others say it understates it. In either case, the calculation has been kept the same since 1963. It could probably use some updating. The person who created the original measure (Mollie Orshasky) has been calling for its update for a decade, saying that it’s been under-stating poverty. But that’s just her opinion….
The DEFINITION of “poverty level” is fine. It’s how we calculate it that should be questioned. Do you see the difference?
However, my comment was “I dunno.” As in I don’t know how “absurd and unsustainable” the current effective exemption on paying taxes for a family of 4 making under $50k is. I just figured we don’t need more people falling into poverty (why take money away from people who are just above poverty level). I’d rather tax the people who can afford it more (and that probably includes me, though I am NOWHERE near the top bracket of wage earners).
Nate,
Read my comment and you will see I wrote the method of calculating the poverty threshold has flaws, but I sincerely doubt it is underestimating the poverty threshold by a factor of 2.27. Unless you have compelling proof to show how the the calculation could be so far off, I’m still going to believe a family of 4 making $50,250 has enough money for their basic needs and more.
How exactly would asking this hypothetical family to pay federal income taxes drive them into poverty? Unless the tax rate was 100% of income above the poverty threshold, this would not happen. Lets say we ask them to pay $1,000 a year, leaving them with $49,250. They are now at 2.23X the poverty threshold, still no where near the poverty level.
Let’s try and see where we can find some common ground:
1) Can we agree that there is some level of income X, where above that income this family should begin paying federal income taxes?
2) I believe that X should be the calculated poverty threshold. You believe this calculation is flawed, but presumably, if the calculation was reworked and done “correctly”, would you also agree that any income above the corrected poverty threshold should be assessed federal income taxes? Or should X be set at some other value other than the poverty threshold?
Finally, what is the correct way of calculating the poverty threshold? You seem to have an idea in your head of who can and can not afford to pay federal income taxes, please tell me there is some reasoning and logic (rather than just a gut feeling) behind your belief that a family of 4 earning $50,250 can not afford to pay federal income taxes. At what level of income should we expect this family to start paying federal income taxes?
1) Yes, there is some level of income where federal taxes should start to be paid.
2) No, I do not think that level is right at the poverty level.
Poverty is NOT a good thing. Why would we ever want to maintain that level of living amonst ANYONE? Point is, we shouldn’t want for “poverty” to be the base level that people maintain. We want them to be better off than that, right? As such, I don’t think it’s a good idea to tax people who are “just above” poverty level.
So, really the question here is, how far above poverty level does “just above” extend? You seem to think 2.27x is more than enough. I think, especially given how, in my view, low $50k is for a family of four, that 2.27 probably isn’t enough.
(As for your last question, the errors that the current poverty calc has and how if could be fixed… Well, let’s update the basket of goods that someone is supposed to be able to purchase if the are earning poverty level income. The basket of “necessary” items has changed a LOT since 1963 and merely indexing them to inflation isn’t good enough. We need them to continually reflect the same standard of living that “poverty” reflected in 1963.)
Agreed with some commenters: some sort of tax increase has to happen to keep the nation and the states from going broke.
As an unemployed old bat who was forced into retirement by the recession, though, the prospect of higher taxes on investment income scares me. I’m barely, and I mean BARELY getting by on Social Security and scrounged-together joblets. Anything that can be passed off as contract work gets paid through my S-corporation, protecting me from the rather cruel penalty Social Security inflicts if you earn more than poverty-level wages but still remain at the poverty level.
When I take a drawdown from my pension funds or a payout from the S-corporation, I’m taking money that will be eligible for even higher taxes than I’m already paying. If more money from my savings is confiscated when I take out funds to live on, then I have a significantly lower standard of living — one that removes me from the middle class.
From the tenor of some of the comments that come into my site, I’m quite sure I’m not alone in this.
IMHO, it’s not the people who have worked hard at productive jobs and now find themselves un- or underemployed who should be hit with tax increases. The folks whose machinations helped to bring about this depression and got rich while they watched the rest of us go down the toilet not only CAN afford higher taxes, they SHOULD have higher taxes. Why? Because they have profited mightily on the destruction of our economy and the pain of their fellow citizens.
If there’s such a thing as a “more fair” tax, then surely the flat tax is less regressive than the VAT.
I lived for some time in England and observed the effect of the VAT on the standard of living. The most ordinary goods are extravagantly expensive, because the price is jacked up at every step along the way, from raw material through fabrication through distribution through retailing via every leg of transportation along the way. As a result, junk that you and I would buy at Target is often beyond the reach of the middle and lower-middle class. Goods of Ikea’s throw-away quality are sold in relatively upscale stores. The gigantic flea markets in London are popular not because Londoners so love to buy second-hand stuff but because they can’t afford to buy things new. That’s the direct result of the VAT.
Get rid of FICA and our young folks can build shacks in the backyard to house the in-laws. Great plan, eh? Which spouse is going to quit his or her job to stay home and care for the old folks when they get really infirm?
The fairest tax probably is a flat tax, providing there are no loopholes and the cost is not more than about 10 percent of income. It would be harder on the poor, but 10 percent of all those bankers’ earned and passive income would go a long way toward refilling the Treasury.
Did you ever consider that “not profitable” ventures were losing money because the Government runs them?
In Europe, the postal services are profitable because they are allowed to offer services that our own USPS is denied by Congress. Congressional oversight and imposed beauracracy forces the USPS down one road only – raising rates instead of cost cutting (firing staff, closing unneeded stations) or more non-standard services like ATMs in the lobby of a post office.
I live in the DC area with a subway (Metro) system. It is losing money every year because they maintain a maintenance staff that is 3 or 4 times larger than necessary. Why would non-revenue generating divisions of Metro (maintenance) need to be larger than revenue generating divisions (drivers, train conductors)?
In the private world, business tend to be more streamlined and avoid excess personnel costs in areas that are unnecessary – blame technology for this one in many cases.
Government involvment brings Government regulation which creates unnecessary inefficiencies that wouldn’t exist in private companies.
Lastly, remember that those who are good at managing get paid to do so. Government managers tend to make less than their private manager counterparts for a reason!
Here’s an interesting idea from a well-reasoned article:
Add another tax bracket to apply to the super rich. Why should Labron James and LaBron James’ dentist pay at the same rates?
http://www.newyorker.com/talk/financial/2010/08/16/100816ta_talk_surowiecki?
I like this idea. Most would agree that $250k a year is a lot of money, but I can understand the argument of those making that kind of income. I can not nunderstand the argument of those whose annual take are in the multi millions.
NateUVM,
I’m very very opposed to the flat tax, but in the ideological sense of the term, it is not regressive. If you truly taxed everyone 5% of their income, you cannot call it regressive just because 5% to someone making less money means more to them than 5% to a millionaire.
I think you’re thinking of the classification of another “flat” tax implemented by states in the sales tax. Sales tax, or a consumption tax, while X% for everyone on whatever they purchase, is not flat, but rather regressive because the less income you earn, the higher percentage of your money must be spent in order to survive, because basic needs cost the same for everyone, regardless of income, so poorer people must spend a higher % and therefore are taxed more than the rich in that scenario.
A tax that truly taxed everyone at X% of the income they earn is truly flat, not progressive or regressive.
I’m against a true flat tax as well, and I think that would inevitably destroy the economy. But obscuring the truth and calling it regressive because you don’t like it or sympathize with middle to lower income people over the rich is still obscuring the truth. A true flat tax is neither progressive nor regressive.
I’ve already addressed this above, the confusing that is defining “flat tax” vs. defining “regressive,” so please refer to that discussion.
But to recap the conclusion…. A flat tax IS regressive, in effect. It may not meet the strictest definition of “Regressive,” because it doesn’t decrease, in an absolute sense, as in the income base increases. But it DOES have a disproportionate effect on lower income earners.
That’s why it’s referred to as being regressive, because that’s the effect. And I’m not sure what other way you’d want to discuss such things, other than how they would effect the taxpayers, in this case.
If you institute a flat tax when unemployment is low, it will increase sustantially if it gets better. I would think government would love that…more money to spend.
Then when they get “maxxed out”, they can switch it back to the current system and the trillion page tax law and employing the IRS’s 101,054 emplyees. Lincoln is probably rolling in his grave knowing what he created…
fyi…we are sooooo progressive.
The Revenue Act of 1862 was passed as an emergency and temporary war-time tax. It copied a relatively new British system of income taxation, instead of trade and property taxation. The first income tax was passed in 1861:
The initial rate was 3% on income over $800, which exempted most wage-earners.
In 1862 the rate was 3% on income between $600 and $10,000, and 5% on income over $10,000.
In 1864 the rate was 5% on income between $600 and $5,000; 7.5% on income $5,000–$10,000; and 10% on income $10,000 and above.
By the end of the war, 10% of Union households had paid some form of income tax, and the Union raised 21% of its war revenue through income taxes.[1]
“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”
Economics in One Lesson – Henry Hazlitt 1946.
If you wonder what will be the outcome of government spending read this book.
“A flat tax IS regressive, in effect. It may not meet the strictest definition of “Regressive,”…
Then it’s not regressive. Regressive means regressive, not what you nor I deem is unfair. I agree with you that it’s unfair, and a bad idea. That’s our opinion. But neither of us get to redefine what a regressive tax is to negative stereotype a true flat tax just because we don’t like it.
Okay. Fine. You win the “definition” argument surrounding “regressive.” Congratulations.
Now, let’s talk about what a flat tax means… IN EFFECT (which is all I was ever saying), a flat tax IS regressive. Not by the strict definition of regressive, but IN EFFECT. Whether it is (as defined) regressive tax or not, a flat tax is regressive in its impact on the various tax classes.
And the effect is all that should ever be considered. Low income earners could care less what the dictionary says about the relative scale of taxes across tax bases. They would only care about how a tax impacts their lives.
Nate –
I’ll ignore the definition debate for now, I think it’s all been said.
Most flat tax proposals include an exemption. The $50K family getting a $50K exemption, and every dollar after getting taxed at the flat rate. No deductions, nothing else. Your 1040 says “take your gross, deduct $50K, and multiply by flat rate. Is that fair?
Dude, I *AGREE* with you that the tax is unfair and would be destructive to the middle and lower classes in particular, and to frankly everyone, as it would lead to an over concentration of wealth.
But it’s not even IN EFFECT regressive. It does not in effect cause people of lower income pay a higher percentage of their income in taxes than anyone else if it’s truly a flat tax, period. It helps no one when someone uses a term that has negative connotations to slur another idea.
Turn the tables around a bit…
Since you’re in favor of helping the poor out, what if I called your idea communist because in my opinion “IN EFFECT” that’s what the idea does? But it’s not, is it? At no point did you advocate abolishment of private property, total control of economic decisions by the gov’t, nor did you advocate an oppressive gov’t that Communism is often associated with today. That kind of crap goes on all the time in political debate, and it doesn’t matter if people you agree or disagree do it. All that does is inhibit real debate and an honest discussion of ideas.
You can get upset with me all you want, but you’re barking up the wrong tree. I agree with you on the issue. I simply disagree with your tactics of persuasion because it perverts the truth.
Aaron, this has nothing to do with labels and such. I’m not trying to color anything so that it has a more or less favorable bent. But a straight flat tax, with no exemption, IS regressive in effect.
You aregue that the rate doesn’t decrease as the tax base grows. That is true. But, as we’ve been over about 50 times at this point, that is merely the literal definition of “regressive.” It has nothing to do with how it actually effects the taxpayers.
The example I’ve already used was a flat tax of 5%. For an earner making only $1000 a year, the $50 they have to pay in taxes would have MORE OF AN IMPACT on them than the $5,000 that someone making $100,000 would have to pay. It would hurt the lower income taxpayer MORE to pay their tax than it would for the higher wage earner.
And THAT is how a flat tax is regressive.
Which is why I am more in favor of a tax structure where people pay more of a percentage on their income as their income base rises. Where the impact of paying the tax is graded out evenly over the taxpayer populace. Something with brackets, I think, might work…
As for Joe’s mention of the assumption of an exemption…I’m not an economist, by trade. I haven’t taken a look at what threshhold would make sense so that it wouldn’t end up being regressive (in effect, of course). However, none of this discussion is based on that assumption as that was not what was mentioned in the OP. That’s why I haven’t really been talking about it. I would agree that an exemption would make it LESS regressive.
“tax that imposes a smaller burden (relative to resources) on those who are wealthier; its opposite, a progressive tax, imposes a larger burden on the wealthy”
http://www.britannica.com/EBchecked/topic/496192/regressive-tax
The resource here is based on a percentage of income. A true flat tax is an equal burden of percentage of income for everyone. That’s not regressive.
You’re bending the definition of regressive. A flat *comsumption* tax can truly be claimed as in effect regressive, as I outlined earlier. This simply cannot be called that even in effect. It’s more regressive than our current system, but again, calling it regressive on an objective scale is the equivalent to calling for example Obama’s health care reform bill that passed, regardless if you agree with it or not, socialist or communist when it’s simply a bit more socialist than the system before, but still overall largely the same system we already had with a few tweaks.
You can believe it’s regressive all you want, but it’s not.
Aaron, you’ve ONCE AGAIN, pointed out the mere DEFINITION of “regressive.” You DID read my earlier post where I ceded that point to you, right?
This has NOTHING to do with the definition of regressive, so you can keep your little link to Britannica.
Come back when you have something new to contribute.
I’m apologize. I have a nasty habit of backing my points up with facts and reason instead of making up definitions to words to suit my arguments. It’s a nasty habit of mine.
Nice passive-agressive reply. It’s no wonder the country is in the mess we’re in. We can’t even discuss topics without getting offended over minutae.
I’ll try one more time…
YOU ARE RIGHT! Your “facts” regarding the textbook definition of “regressive” is SPOT ON! YOU WIN! (By the way, this is something I’ve agreed with from VERY early on, here…)
Now, as for the ability to reason… Just because a tax isn’t regressive in structure, doesn’t mean it isn’t regressive in effect. You have failed to demonstrate otherwise. All you keep talking about is how the tax rate is the same no matter what you earn… So, yes. The structure is, by no means, regressive.
Can you step outside that box of stubborn that you’re stuck in and try to discuss the effect…? I wonder.
Can I ask why you’re insisting on calling it regressive when you agree it’s not? Why wouldn’t you call it “unfair”, or something like that?
It’s like arguing a table is black if it’s actually through and through brown undeniably brown. Well, it’s black *in effect*! So just call it brown!
Because….while it isn’t regressive in structure, it’s regressive in effect.
Regressive implies that it has a higher impact on lower income earners than it does on higher income earners.
A strict flat tax (again, with no exemptions) isn’t regressive in structure.
A flat tax does, however, it DOES have a greater impact on lower income earners than it has on higher income earners(due to the decreasing marginal value of income). As such, it may as well be regressive in structure, as that’s the effect that it has. Thus the “in effect” statement.
I’m not going to be subjective about it and say that it’s “unfair.” How fair is it that higher wage earners have to pay more than poor people in our current system? I’m not making any value judgements here.
But to deny that a flat tax is regressive in effect is to get bogged down in semantics.
Using your example, say it’s a brown desk…what if everyone is wearing black shaded glasses(if that’s even possible…but work with me, it’s your example)? Doesn’t matter that the desk is brown. The only thing that matters is how people experience its color. They see it as black… It may as well be a black desk.
Thank you for making my point. Not everyone wears shades in this room. Poorer people would be wearing the shades only. That’s the problem. Now you get people bickering about what color the table instead of having a real honest discussion because you interjected the sunglasses on the poor people. That gets everyone, rich and poor, nowhere.
“Regressive implies that it has a higher impact on lower income earners than it does on higher income earners.”
By percentage of resources only, not by how much they feel. What you’re doing is a slippery slope. How do you define then when a progressive tax isn’t regressive? You’ve already stated above proposals of flat taxes, which actually are progressive tax plans, are still regressive. So a progressive tax is regressive, unless it’s progressive enough for your liking?
That’s what I’m getting at here. There’s varying shades of regressive/progressive/flat. But you’re insisting apparently to call a true flat tax regressive, and some progressive tax plans regressive. Now there’s absolutely no meaning to the terms “regressive”, “progressive”, and truly “flat”.
It completely makes sense to say “flat taxes aren’t progressive enough” even if someone disagrees with the statement. They at least can understand the statement. I would even understand if you said the above flat tax proposal, which is actually progressive, is effectively flat, or too flat, and would cause unnecessary hardship on lower classes. That implies a lack additional needed progressive elements to the structure. That means something.
But to call a flat income tax regressive destroys the meaning of regressive/progressive/flat. There has to be some objective scale here, or I could call a socialist tax plan regressive simply because I don’t think it’s progressive enough. The truth is it’s progressive, regardless if it’s progressive enough for me.
Aaron, you’re confusing a metaphor that involved sunglasses with the premise that someone is trying to color an argument and is wearing fill-in-the-blank-colored sunglasses. They’re not the same thing… Again, you’re getting lost in the nuance. Again.
Furthermore, I have yet to make ANY valuation on any REAL flat tax proposal. It is true, with their various suggestions for exemptions, most flat tax discussions are more progressive than not.
But that has NEVER been what I have been discussing here. I have ONLY been talking about a strick, straight flat tax.
Given that you are so confused as to what we are actually talking about… Why don’t we just call it a day?
I completely understand what you’re trying to say. You’re not confusing me in the slightest, nor would you confuse anyone who actually understands what a regressive tax is. You’re just confusing other people who may not, thereby slanting the discussion, and reducing honest debate and understanding about this topic. While I agree with your opinion that a true flat tax is unfair, I’m not onboard with redefining concepts to make a better argument.
Feel free to post back if you’d like, but I’m done.
And here I thought that a regressive tax was a tax that imposes a smaller burden (relative to resources) on those who are wealthier; its opposite, a progressive tax, imposes a larger burden on the wealthy. That’s the only definition we’re working with here. To the best of my knowledge, that’s exactly what you believe it to be, too, so….
Maybe it’s you who is getting in the way of honest debate by getting lost in nuance, getting hung up on definitions that don’t apply to the heart of the matter and thus missing the point?
Yeah. That might be what’s going on here… Have a good one, though.
I would look at parts of the government that are going down in need (postal service for sure) and either reduce the workforce in headcount or in # of days delivered to meet the need.
I, for one, would not miss Sat delivery or even if it went to 3 days a week. Everyone would still get there sales ads on Monday and all the credit card offers the other 2 days.
The market would adjust to this and no one would suffer (except the overpaid, underworked mail carriers)…
This is only one example; I’m not singling out the postal service, just an easy choice.
If you do not do the above, at least make people pay a fair cost for mailing, say $.99 for a stamp to ship something across the country is not expensive people.
Prior to the creation in 1913 of the national income tax, about a third of Uncle Sam’s annual revenue came from liquor taxes.
Prohibition became more feasible in 1920 because income tax revenues swelled Federal coffers. But, when income tax revenues plummeted in the Great Depression, congress needed the liquor taxes again. That helped drive repeal of the 18th amendment.
Today in California local govts look to end marijuana prohibition to gain tax revenue.
http://www.pittsburghlive.com/x/pittsburghtrib/news/s_518872.html
Good info and lots of good responses. The bottomline regarding taxes is very rarely are new taxes or tax increases good for taxpayers or the economy. By cutting or lowering taxes there is more money pumped into the economy by you and I spending it on various items and services.
But Pedro, more taxes would allow more people to get government jobs and for every $1 spent, we’d get $1.60 back into the economy…
I just love it when “they” say that one…
I am 57 and have been retired for almost 4 years and my husband for almost 7 years. We are not part of the (rich) we are just comfortable and will never work again,Lord willing. This is what happens when you increase taxes. We were never in the top brackets but with payroll , cap gains and dividend taxes and having to save for our retirement …we lived on half our income for a long time. Now we pay little or no taxes. Could I be a producer… no incentive….above 140 IQ many will follow our lead.
Some years ago I bought 100% of a dying sub-S company. Two years later I had turned the tide and was making a substantial profit, which, I came to learn would be taxed at ordinary income to me. Worse, the dollars I put back into the company to solidify and continue its growth would be with after-tax dollars. After consulting my accountant, I contacted my lawyer, and POOF!… I was incorporated. The whole deal took less than a week, most of that time was spent educating myself on tax consequences.
My first two years I didn’t pay a dime in income taxes, but I wasn’t happy. X% of zero is still zero. Subsequently, intoxicated by success, I became one of those obnoxious, woe-is-me moaners about his tax bill. Honestly, that’s simply a not particularly subtle way of bragging. In fact, it became my goal to achieve the highest tax rates.
IMHO higher tax rates for small business should not be an issue.
As far as inheritance taxes, I side with Buffett and Gates — educate your kids, provide for them a reasonable nest egg, return the bulk of your estate back into the ‘pool’. It makes for a better society when those at the top, do so on merit.
This article is WAY out of touch with reality. The bottom line is that the BUSH TAX CUTS BENEFITED THE LOWER-MIDDLE CLASS THE MOST.
Percentage-wise, a reduction of the lowest bracket from 15 to 10 percent is much more substantial than lowering 36 to 33 percent. A 5 percent reduction in the 15 percent bracket is a 33% decrease, while a 3 percent reduction in the 36 percent bracket is an 8% decrease in taxes.
Who does that help out most? The middle and lower class, hands down! Add to that a doubling of the child tax credit, and MANY lower-middle class families have done much better tax-wise, including myself.
-JC
We don’t have a tax problem in this country, we have a SPENDING PROBLEM. Keep taxes low. Stop spending and stop talking about how much we can stick it to the rich. Ugh.
We don’t have a tax problem in this country, we have a SPENDING PROBLEM. Keep taxes low. Stop spending and stop talking about how much we can stick it to the rich. Ugh.
I couldn’t just put “agreed”…too few letters for the blogging gods…repetition is the father of learning, mother of retention.
What is so wrong with a flat tax,,,,everything here in the US is supposed to be equal,,, why not income,,,Buffet said,, He paid less than his secretary. What’s wrong with a straight FLAT tax of 10%,,, people,corp’s,,etc.no deductions,,,,We need to Graph that one and see….
Mr. Wang I stopped reading your article after your writing revealed you do not have even a grade school grasp of math. A 3 percent tax rate reduction on what was a 28% rate is a 9.33% reduction. A 3 percent tax rate reduction on what was a 36% rate is an 8% reduction. A 9.33% reduction is greater than an 8% reduction thus those in the 28% tax bracket did indeed receive a relatively greater benefit from these tax rate reductions than would those in the 36% bracket.
Further is it obvious that you earn less than $250k a year by your willingness to make those that do, shoulder an even greater tax burden than they already do. That by the way is 67% of all taxes paid. That is more than enough. The tax rates reductions during the Bush Administration reduced rates for all Americans, but as a matter of fact and mathematics those with the lowest incomes received the greatest relative decreases. Exactly the opposite of your erroneous statement.
While I am not an economist and my math skills are sub-par, I do wonder about tax breaks for the rich. I keep hearing the Re-pubic-ans blabbing about how jobs won’t be created if we raise the taxes on the super rich. These tax breaks have been in place for 10 years now and where are the jobs??? Is this their brand of the Reagan trickle down economics ??? You people, yes I said “you people” will not support president Obama even when he puts forth ideas that “you people” supported in the very recent past. I think the main problem is that most of “you people” are racist to the core. Mitch McTurtle & Eric Cantor are easily the worst of your bunch. They will let the poorest of the poor suffer the most only for their politcal gain. What is wrong with “you people”??? “You people” make me sick with all the lies you manufacture and your constituency believes them because they are basically to ignorant of the truth and don’t want to hear anything that resembles fact!!! Shame on all of “you people”. Again you make me sick !!!