Tax Day Tally

Dear Secretary Geithner,

Today is tax day, though I paid my taxes a week or so ago.

Each year, April 15 gives me pause, since I am forced to actually look at my finances and think about the money I send on to the government. Most years I get a refund for amounts I've overpaid. Getting a big pile of money is generally a happy thing, and I tend to focus more on what I'll do with that stack o' cash than the money that I've already paid.

However, this year I had the dubious privilege of writing a check. And as I wrote that check, I began to think a bit harder about the sum total of the taxes I pay. And not just the complexities of the tax code, such as the difference between marginal and effective tax rates, which we've talked about before.

I started with my Federal and State (Illinois) income tax, thinking that would be a pretty big dent in my family's finances. I was a bit surprised, as we only paid about 16.8% of our total income to income taxes. Not bad!


Then, I realized that this was not the end of my tax payments. Indeed, every time I make a purchase, I pay 10.25% in various sales taxes: Illinois takes 6.25%, Cook County takes 2.75%, and Chicago takes an additional 1.25%*. That's nearly as much as the amount I pay in income tax! Yikes! Thankfully, I'm not a homeowner, or I'd be paying property taxes too!


But then, Mr. Geithner, I started thinking about all those tax dollars and the things that are accomplished with them. Besides paying for Blagojevich to take his family to Florida for a last fling before he goes to jail, my tax dollars help build roads, provide health insurance to poor people, and make sure my peanut butter stays free of salmonella. I'm pretty sure at least three of those are good things.

You know what I realized? I realized that the taxes I'm paying this year don't come close to paying for all the things that my government does. Chicago, Cook County, Illinois, and the USA are all dealing with the fact that they've spent more than they 'earned,' and they are now looking for ways to close that "budget gap." Illinois is likely to raise the state income tax to 4.5%. The Federal government will probably just sell more T-bills to China.

And all of that money will need to be paid back someday. So eventually, I bet we'll have to raise taxes to cover that as well. Let's just call this a "Future Tax." Here's what it looks like, split out per person.


Oh, my! That's a lot of money! I'm not sure where the government is going to get all that. I sure don't want to foot that bill, though I suppose I already am in some form or fashion. Perhaps this is why there's such outcry against taxes this year, in the form of "Tea Parties" and the like.

Mr. Geithner, I really hope you can come up with a plan to help pay down some of this debt. Our country can't live on credit cards borrowed money forever. And the amount I'm paying in taxes have to do other stuff besides pay interest, like pay the Navy to fight pirates.

And, as the House of Representative's own Harry Reid says, our taxes are voluntary anyway:



So, I guess my point in all this is that while you guys in government have managed to keep our income taxes pretty low, it would be nice if you kept the other, less visible taxes low as well.

And as a helpful reminder, don't forget to file your taxes today! I've heard you've had troubles with that in the past!



TheUkieVillain



P.S. If anyone is interested, the research and sources for debt and such can all be found here and here. It isn't pretty, but you can at least follow it back to the source. Consider this a footnote.

*The sales tax is reduced quite a bit for buying food. But it's even higher than 10.25% when buying gas, alcohol, and cigarettes (glad I'm not a smoker!). Oh, and Chicago has an extra tax on bottled water, extra taxes on fast food in the downtown area (aka tourist tax), extra taxes on parking downtown (parking!?), and an extra amusement tax at many of the popular attractions, like Navy Pier.

The Invisible Hand, Distribution of Wealth, Marginal Tax Rate, Economics of the Candidates, and Economists on the Candidates (Whew!)

Dear Adam Smith,

I have been working on trying to figure out two things.

1. What the heck is going on with this economy?

2. What are the politicians going to do to pay for all the fixes they are promising?

Whenever I start to research, I get pretty confused. I get distracted and even trying to write to you, I keep going off on tangents in my mind. I can't stay focused on this. I certainly hope that neither Barack Obama nor John McCain taps me as next Secretary of the Treasury. I just don't think I could stay focused.

What was that you said? If I understand you right:

A natural force guides free market capitalism through competition for scarce resources. And in a free market each greedy person will try to maximize self-interest, and their interaction with other greedy persons will lead to exchange of goods and services, enabling each to be better off than when simply producing for himself/herself. You said that in a free market, no regulation of any type would be needed to ensure that the mutually beneficial exchange of goods and services took place, since this "invisible hand" would guide market participants to trade in the most mutually beneficial manner.

So supposedly there is this hand, not the hand of God, but this other invisible hand that reaches in and keeps everybody doing what they should do economically. But "should do" for who? Did you ever imagine the New York Stock exchange? Or how about this?

I couldn't find fresher figures, but these are reflective of current realities and are from this website.

It seems to me that the invisible hand has lost it's touch or is working very hard only in favor of a very small elite group of people. If this is the best the invisible hand can do, I think we need some regulation. Here is my problem. I just don't believe that the top 1% of the population should hold and control 40% of the nation's wealth. If it were true that this top 1% had earned the right to hold that wealth, perhaps I would be convinced that they deserve this wealth and it's attending power. However, this elite has not, generally speaking, earned this wealth. They have inherited this wealth. The money that they have inherited has earned this wealth. But they, as a group, have not.

In addition, those who have earned this wealth have done so, not alone, but on the backs of working people, many of whom are working for minimum wage. According to an article from July by the Center for American Progress

Over the past year, a family of three supported by one minimum-wage earner still lived over $4,000 below the federal poverty line—earning just $12,168. That same family will now bring in $13,624 before taxes—well below the 2008 poverty line of $16,705. And when the wage reaches $7.25 in 2009, they'll earn a little over $15,000—still 18 percent below the poverty line. Minimum wage-earning households with additional members are likely to live even further below the poverty line.

What has the invisible hand been up to for these folks? Should people in the the richest nation in the world be in a situation that they work a full-time job, steadily, day in and day out, and they can't afford to feed themselves. They can't buy a dependable automobile. They can barely pay the rent on substandard housing. The working poor are further humbled (spell that shame for some) by being forced to go hat in hand and beg for food stamps, housing aid, and other assistance. This assistance comes at a high price to the broader community. We pay double or triple, for what the working poor should be receiving in a fairly earned paycheck. However, there has been some kind of sleight of invisible hand that keeps minimum earners under the very heavy thumb of employers (some wealthy, some not) screaming "I can't pay."

Meanwhile, in this very scattered letter, I want to talk about taxation. Now there is this term, marginal tax rate. I am not sure I really understand what it means. But someone said this:

The marginal tax rate is the rate of tax applied to the last dollar added to your taxable income. As your income increases more taxes are paid on this "top" level of income. For example, the income you earn from investments is added to your income from all other sources. As a result, each additional dollar of investment income is taxed at the highest rate applicable to your total income.

but

The average tax rate is calculated by dividing the total income taxes paid by your total income. The average tax rate incorporates taxes paid at all levels of income so naturally it will be less than the marginal rate, although a person’s average and marginal tax rate will be close to equal for very high-income earners (taxable income over $2,000,000).

I kind of wish I understood what that means and how that affects my life. I'll keep thinking about it. Write and explain it to me. But from the Yale study that CaDh8 referred to in an earlier post, I learned this:

The reduction of marginal tax rates in the Reagan years was driven by a new policy consensus that still persists today. That consensus is that high marginal tax rates on the rich come with an unaffordably high price for the U.S. economy in the form of reduced incentives for the rich to work and to save, and increased incentives to engage in socially wasteful tax planning. And yet 1957, when Rand wrote Atlas Shrugged and the top income tax rate was 91%, falls in the middle of the period from 1951 through 1963. Those were the golden years of the U.S. economy, in which the average annual rate of productivity growth was 3.1% (compared with about 1.5% after 1981). Of course, the growth might have been even faster had the marginal tax rates been lower, but the coincidence of high rates and high productivity raises challenging questions for those who believe that high marginal tax rates carry an unacceptable cost.

Somehow I think that is interesting and would support Senator Obama's Tax Plan, if I understand this correctly.

In the spirit of KISS (Keep It Simple, Stupid) I have tried to collect some summary ideas. I've read different descriptions of the plans, but this guy Justin Tapp seemed clear and concise to me. Plus he referenced his ideas so go to his site for more info.

The Tax Plans

I. Obama would raise income taxes on the top two tax brackets to pre-Bush levels of 36.9 and 39% respectively. (The top rate is currently 34% for people who earn more than $250,000).
Obama would also impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises by 12 to 14 percentage points, from 37.9 percent to roughly 48 to 50 percent.

Obama would also raise capital gains taxes on people earning >$250,000 to 20%, which is more than today but less than it was before 2003.

McCain would keep the top tax rates, dividends, and capital gains taxes where they're at.

II. Obama would raise corporate income taxes, but cut them for business that "invest in creating jobs in America" and eliminate capital gains tax for small businesses and start-ups.

McCain would lower corporate income taxes.

Note: Corporate tax rate is currently 35%. But there are a lot of loopholes in the tax code that keep corporations from actually paying the 35%. Obama says we need to close the loopholes.

III. McCain would double the personal exemption for families with children from $3,500 to $7,000.

Obama would give a $500 payroll tax cut to workers. He also would double the Hope credit for college to $4,000 from $2,000 and make it fully refundable.

IV. McCain would eliminate the tax exemption on employer-provided health care (raising taxable income) but would provide a tax credit of $2,500 (singles) or $5,000 (couples) to more than offset the proposed tax increase. Any of the credit not spent on insurance could be put into a health savings account.

Obama would give tax credits to businesses that provide health care to employees. Other aspects of his health care plan would supposedly reduce health care costs by $2,500 per family.

V. McCain wants to abolish the estate tax for everyone (this is a Republican plank).

Obama would eliminate the estate tax for 99.7 % of estates. He would increase the top estate tax rate ($3.5 million per person, $7 million for couples) to 45%.

VI. Obama's plan would add $3.4 trillion to the government debt over the next ten years according to the Tax Policy Center.

Senator McCain's plan would add roughly $5 trillion to the debt.

Lastly, here is a little chart showing the gut reaction of economists to the plans of the candidates. I'm wondering which plan you would prefer?

Economists on Economic Plans



Well, after all this, I can only leave you with the plea that you will answer and help straighten me out. I feel like I'm fading.

BRD

PS Do you think I'm a socialist?