During the presidential election (boy, aren't you glad that nonsense is over?), there was a lot of talk about how to define a "rich" person. If I recall correctly, some estimates got as low as someone making $70k per year being "rich", though I'm not sure if that was someone's actual thoughts or their opponent's spin on their thoughts. I guess it doesn't really matter now anyway.
What does matter is that President Obama is now working on his new tax plan and he's defining "rich" as someone earning over $250k per year. Under his plan, these people would be charged higher tax rates and have the level of their deductions reduced. The Wall Street Journal recently detailed the various issues associated with the changes, which are still very much in flux.
Here's what I see as one of the key parts of the Journal's piece:
By any statistical measure, that income level ($250k per year) is at the top of the bracket. But for those closest to the line, the money might be less a sign of affluence than it is of the industry of dual-income couples. It is possible, say observers, that veteran civil servants could fall into the higher tax bracket.
This whole issue brings up several thoughts from me:
1. I don't think anyone is going to say that someone earning $250k per year isn't at least doing "fairly well" for themselves. Look at the numbers, see what most people make, and $250k is pretty good.
2. That said, $250k lasts a lot longer in certain areas of the country (as we've discussed.) $250k in Indianapolis is a LOT more than $250k in NYC or San Francisco.
3. I have no doubt that "those closest to the line" will have the biggest issue/problem with the proposed changes. After all, if someone making $250k is in the same bracket as someone making twice that much or more, doesn't the $250k person feel the impact more financially?
4. It seems to me that some sort of flat percentage could take care of all this mess. As income increases, then total tax dollars increase (though the percentage paid stays the same). But changing our tax code to something simple and even remotely fair is an impossibility IMO. Too many special interests.
5. What's going to happen to taxes? No one knows, especially in this economy. I don't think it's wise to raise taxes on anyone given the frailty of the system now, but what do I know? I never claimed to know anything about economics. Maybe those of you more knowledgeable on this issue can chime in with thoughts.
People making over 250K will only be taxed in the highest bracket on the income that they make in excess of $250,000, so the impact would not be felt much stronger for someone who is only slightly over the line versus someone who is well over . . .
Posted by: Jake | April 30, 2009 at 06:57 AM
The tax code will always be a social experiment when the government decides who gets the tax breaks and for what. Higher incomes will pay higher taxes, naturally, if left alone. But why do lower incomes receive 3K, 4K or more of REFUNDABLE credits like earned income credit and child tax credit? The social experiment develops a portion of society who votes in government based on how much they will receive back rather that voting in a government who will spend the tax dollars wisely.
Posted by: BA | April 30, 2009 at 08:58 AM
Socially, the government gives married people (filing jointly, of course), the best tax breaks.
Posted by: catchthefever | April 30, 2009 at 09:31 AM
I'm all for a flat tax. Make the income tax flat for all incomes. Make the FICA tax flat for all incomes too.
Make all incomes eligible for all the same credits and deductions, such as child tax credit and IRA contributions.
Posted by: rwh | April 30, 2009 at 09:45 AM
Right Jake. I have read articles of people making bad decisions so they "stay under the $250k limit" when only the money above that will get taxed at a slightly higher rate.
Posted by: Chris | April 30, 2009 at 09:49 AM
I'm more for a high sales tax with no income tax. This would promote saving and responsible spending. I know it would hurt the economy even more in the short term but it would increase our stability in the long term.
Posted by: Wise Money Matters | April 30, 2009 at 09:51 AM
In a time of such economic instability, I think that raising taxes is terrible. In order to pay for all of these new programs and bailouts, the U.S. economy is going to have to grow. The best way for us to grow the economy is to encourage investment by lowering taxes.
Posted by: Fred | April 30, 2009 at 11:07 AM
Yes, those closest to the line will feel virtually nothing. A couple making $300k will see their taxes go up about $30 a week. If you think that is going to blow up the economy then we have much bigger problems...
Posted by: Bogo | April 30, 2009 at 11:12 AM
I agree with Fred. Even though the national debt doubled in the last eight years (http://www.treasurydirect.gov/NP/BPDLogin?application=np), going from 5 trillion to 10 trillion dollars, why should the burden of taxes on us be raised? Is it our responsibility to pay off the debt by raising taxes? Let's leave it for our children and grandchildren and great-grandchildren to pay off.
Posted by: Kevin | April 30, 2009 at 11:44 AM
I'm hoping he will correct me if I'm wrong, but with point #3 above, FMF appears to be demonstrating that he doesn't have much of a grasp of how our tax system and tax brackets actually work. Even though he claims to not know anything about economics this is pretty disappointing coming from somebody running a finance blog.
Posted by: MonkeyMonk | April 30, 2009 at 11:46 AM
MonkeyMonk --
You'll need to be more specific for me to answer directly, but you can rest-assured that I understand the difference between marginal and effective tax rates.
Our whole tax system is based on the fact that at the same tax rate, the burden/impact is greater on the one with the lower income. That's why the tax rates increase as income increases. Now you may disagree with this (and thus advocate a flat tax rate) but the comment that someone at a lower income and yet the same marginal rate rate is going to feel more impact seems very appropriate to me. Unless I'm missing something?
And, just for the record, simply because someone has a personal finance blog -- even a popular one -- doesn't mean they know hoot about personal finances. Same goes for the MSM -- just because someone writes for the WSJ or CNN Money doesn't mean they really know anything about managing personal finances. I'm sure you know this, but other people reading this thread may not, so I bring it up.
Posted by: FMF | April 30, 2009 at 12:45 PM
I too don't understand point #3. It sounds as if FMF isn't aware of how tax brackets work. But I doubt thats the case. Anyone making $250k+ will get the same tax increase on any dollars above $250k. Someone making $250k will still have a lower effective rate than someone making over $250k.
Give me a raise to $250k and I'll pay 39% on the raise.
If you're making over $250k then you are in the top 2% of the US and the top 0.001% of the world. If that ain't 'rich' then I don't know what is. The WSJ article talks about a surgeon making over $250k and quotes him as saying "I thought we were just good old middle class". Top 2% is not "middle". They should step back and get a grasp on reality.
Stories of people making $250k a year and allegedly 'struggling' are usually BS. They omit the details on how those people are squandering all their income.
Posted by: Jim | April 30, 2009 at 12:45 PM
Jim --
See my comments above to Monkey.
Also -- ha! Give me a raise to $1 million and I'll pay the taxes gladly too!!!
That's really not the greatest argument -- though your point on the top 2% is well taken.
Posted by: FMF | April 30, 2009 at 12:52 PM
"Our whole tax system is based on the fact that at the same tax rate, the burden/impact is greater on the one with the lower income."
I don't understand that statement. For 2 people in the same bracket the person making more is paying a higher % of their income in taxes. Higher % is higher burden.
Example:
For a single person the 33% bracket is for income of $171,550 to $372,950
If you make $172,000 your effective rate is 24.36%
If you make $372,000 your effective rate is 29.01%
How is 24% a higher burden than 29%?
Posted by: Jim | April 30, 2009 at 12:57 PM
Generally the tax rate may be better for married couples. But in my situation I will owe more taxes if I get married, and miss out on deductions and the make work pay credit. Making the difference in taxes between the two of us almost 1000 if we get married. Needlesss to say, I'm putting it off.
Posted by: Angie | April 30, 2009 at 01:03 PM
Jim:
It may be a lower percentage of total income but that's not the point. The tax code tries to take into account the fact that basic necessities take up a higher percentage of a low wage earner's income. For example, someone who makes $40,000 a year spends a much higher percentage of their income on food, rent, clothing, etc than someone who makes %100,000 per year. That's why a 10% tax on a low wage earner creates a higher burden than the same tax rate on a rich person - they have much less room in the budget to absorb those costs.
Posted by: Pete | April 30, 2009 at 01:07 PM
Jim --
You can see the situation better at the lower levels of income. For example, two people:
"A" makes $9,000 a year
"B" makes $32,000 a year
Both are in the 15% tax bracket.
For 2009, they would pay:
$933 for "A" for an effective rate rate of 10.36%
$4,383 for "B" for an effective tax rate of 13.70%
The absolute amount for "B" is greater as is the effective tax rate.
Now, why is this? Why has our government decided that someone that makes more money should pay more taxes? Is it because they get more services? Maybe they get access to libraries, roads, etc. that the poorer people don't get? Nope. So how do we justify the fact that "B" ends up paying more? Why should he?
I'm interested in your answer...
Posted by: FMF | April 30, 2009 at 01:09 PM
BINGO!!!!! Give Pete a cigar!!!!!!!
Posted by: FMF | April 30, 2009 at 01:11 PM
Seriously? Anyone who didn't know that really needs to never, ever take a position on our tax system until they learn how to crack open a book.
Posted by: Sarah | April 30, 2009 at 01:21 PM
FMF,
OK I now understand what you're saying.
I thought you were saying that our current progressive tax system was more burden on people making less money. But you were instead saying we have a progressive tax system because of the rational that higher tax rates would be more of a burden on lower income people.
Now it makes sense. I just misunderstood what you were saying.
Posted by: Jim | April 30, 2009 at 01:40 PM
Sarah, "Seriously? Anyone who didn't know that really needs to never, ever take a position on our tax system until they learn how to crack open a book."
Who didn't know what?
Posted by: Jim | April 30, 2009 at 01:43 PM
"Why has our government decided that someone that makes more money should pay more taxes? Is it because they get more services? Maybe they get access to libraries, roads, etc. that the poorer people don't get? Nope. So how do we justify the fact that "B" ends up paying more? Why should he?"
Would a flat tax fix that? No. If we have a 20% tax and someone makes $20,000 then they pay $4,000 and if someone makes $1,000,000 then they pay $200,000. Thats a $196,000 difference in taxation based purely on income. Does that person making $1M get better roads and libraries? No.
No matter how you look at any tax system you could declare some element of it 'unfair' by some measure or rational.
You could even design a per capita flat fee tax. So everyone man woman and child is responsible to pay a usage fee for living in the USA. Sound fair? With our current federal budget that would come out to about $10,000 per capita. Is it not fair for a family of 5 to pay $50,000 in taxes to the USA? Are they not getting hte same roads and libraries that eveyrone else is?
Posted by: Jim | April 30, 2009 at 01:47 PM
Jim --
I guess those are right:
1. "Fairness" is in the eye of the beholder.
2. We'll never get anything that everyone considers "fair." Ugh.
Posted by: FMF | April 30, 2009 at 02:02 PM
"Why has our government decided that someone that makes more money should pay more taxes? Is it because they get more services? Maybe they get access to libraries, roads, etc. that the poorer people don't get? Nope. So how do we justify the fact that "B" ends up paying more? Why should he?"
Usually the wealthy do get to take advantage of government improvements...
A better infrastructure or technology investment will help grow business which will in turn give more high paying jobs and raises.
The defense budget employees people through investment and wars.
You CAN make an argument that the rich get a better return on tax spending.
Posted by: My Life ROI | April 30, 2009 at 03:52 PM
"It is possible, say observers, that veteran civil servants could fall into the higher tax bracket."
I find this disturbing. Shouldn't we be trying to cut this back before asking others to pay more?
Posted by: Jon | April 30, 2009 at 04:11 PM
I knew I couldn't leave this one alone. My problem with a flat tax is that it assumes that $1 is as easy to be made no matter who you are, and that during good and bad economic times all groups generally rise and fall at the same rate. But when you look at the economic data, the ability to make money grows exponentially as you keep going towards the richest person in America. Money makes money like nothing else, and the past 30 years have really shown off that fact.
The conflict in ideology that people like Jim and I will always run into, is that I believe that a society and country is made up of more than just what services you use, just as our economy is made up of more than just what I buy. A poorly educated, immobile, uncertain, and unsafe America will not last long in the big scheme of things. And to keep things going requires those with the most money to pay for it.
Frankly, those who should be upset are those in-between the top 98% and 99.9% percentile of income but not for why you might think. They pay basically the same rate as all top earners, but the difference between their incomes is massive. The top 99.9% make $5.6 million a year. And really the top 99.9% should be looking at the top 99.99% because their average is $25 million! But when talking about the top 2% they all get thrown together in the same "rich" box. And effectively, those at the tippy top are paying way less because there income is almost entirely in capital gains, and other tax light ventures. So, the millionaires ARE being screwed after all! By the billionaires... I don't know about anyone else, but those numbers always surprise me.
Posted by: Chris | April 30, 2009 at 04:21 PM
Jon said: "It is possible, say observers, that veteran civil servants could fall into the higher tax bracket." I find this disturbing. Shouldn't we be trying to cut this back before asking others to pay more"
I really don't know where they get the idea that this is going to touch "veteran civil servants".
The ONLY "civil servant" that I can find that makes over $250,000 is the President of the US. 4 star Generals, Congresmen, Senators, The Vice President and the Supreme Court Justices don't make over $250,000.
All the pay for federal employees is public info.
Maybe they are talking about state or local government employees that are over paid??
Posted by: Jim | May 01, 2009 at 07:22 PM
I have an idea for revenue...end the mortgage interest deduction. Houses add no value to society, in fact, because of roads, longer distances for buses, fire and police protection, they actually are a greater burden on society so why is it that we give them a bonus?
I think before any tax increase is discussed, cuts should be made. As a person, if I see that money is going to be short, I don't keep spending but find places to save as that is usually much more logical than creating new revenue streams. Why does the government not do this first?
Flat tax: A makes $50,000 at a 20% rate therefore paid 10K in taxes.
B makes 100K at the same rate and pays 20K in taxes. I am still lost to see how it is fair to increase the burden on B when B is already paying more in taxes?
Posted by: Todd | May 03, 2009 at 11:04 AM
Chris,
You've made a great argument. Well done! The people between 250K - 1M are getting screwed. Let's look at the marginal tax rate of someone living in CA who is making over $250k per Obama's plan:
1. Raise the federal tax rate from 35% - 39.6%, check.
2. No caps for social security deduction. That's 12.5% boys and girls, not 6.2% because either you are self employed and have to pay 12.5% directly or your employer pays the other 6.2% and you can be sure this money is deducted out of what would go into your salary, as it is what the company can afford in total.
3. Medicare of 2.5%, no cap on income for this
4. State taxes of 10% for the top bracket in CA.
5. State unemployment insurance - not sure what this works out to be.
So let's sum up the marginal income taxes at this point... 12.5% + 2.5% + 39.6% + 10% = 64.6%! Seems pretty high to me. Don't forget you have to pay property taxes and sales income tax of 7% as well. And you still need to pay for healthcare as well.
But hey, you are rich. You need to be punished so congress can get their full salary for life when they retire and every gov't employee needs to get full free healthcare for their whole life.
People, we need to demand the gov't start to cut their spend on employees and do this now.
Obama math is as fuzzy as it gets.
-Mike
Posted by: Mike Hunt | May 04, 2009 at 12:49 AM
Well, that sort of bastardizes my point Mike. Would you agree then, to raise the rates on those making over $1M a year? $10M? Or is that not "fair" either. My point is that income is exponential, but we dumb down the tax code into big chunks. This works for the bottom 99% of the tax base, perhaps even the bottom 99.9%, but after that it is just not even close.
I wonder if taxes could be done in some kind of ratio, to better differentiate between those making $250k and $250M a year. I don't have the math to figure that one out though! There is a flat tax, why not a curve tax? :D
Posted by: Chris | May 04, 2009 at 11:46 AM