Wednesday, October 22, 2008

The Republicans' Dirty Little Secret

No matter how high the rate is in the highest tax bracket, that is the tax bracket that every Republican (and Democrat for that matter) wants to be in.


  1. It had to be said. To take it a step further, if you have to give up 70 percent of your income to taxes, and you're still left with more than enough, quit bitching! What qualifies as more than enough? That's highly debatable, but I think owning more than one home (where only you and your family live) is a good giveaway.

    I suppose that's the main thing that makes my ideology so un-American. I don't believe the people who live more comfortably than the rest of the world have some kind of natural right to live the most comfortably of everyone.

  2. Vinny, I wasn't aware that was a secret.

    I think the dirty secret is that the highest tax bracket will almost certainly have to creep lower and lower to finance all of Sen. Obama's dreams.

    Pokey, your comment seems to rest on the notion that it's ok for the government to take large amounts of your money. It's not. If people don't have a fundamental right to what they earn, then everything else is in jeapardy as well. You end up with your existence being a privilege granted by the state.

    I believe strongly in charity, in helping those who don't have enough to survive, in taking care of those who can't take care of themselves. But not at the point of a gun. (Think I exagerate? Tell Uncle Sam "no" on tax day and see what happens.)

    My question for you is why do conservatives give four times as much to charity as liberals (this is income adjusted)? We all pay the same taxes, but liberals seem to think their support for government redistribution relieves them of any further obligation.

  3. Chris,

    Please do not be so naive.

    The government of the United States has always been in the business of picking economic winners and losers and they have frequently done it at the point of a gun.

    Alexander Hamilton’s 1st Bank of the United States assumed the revolutionary war debts of the states in the 18th century thereby enriching the speculators who bought the bonds at steep discounts. The largest banking fortunes in the country resulted in large part from doing business in government bonds. The railroad fortunes of the 19th century were based on government land grants and government financing (which was just a redistribution of the land that had belonged to the Indians). The steel fortunes depended on federal troops to break strikes at gun point. Throughout the 20th century, the United States meddled in the affairs of foreign governments on behalf of corporate interests in places like, Guatemala, Iran, and Chile.

    Do you know who is governor of the state that practices the purest form of wealth redistribution? Sarah Palin. Every year the state of Alaska taxes the oil companies and sends a check to every resident of the state. One of Palin's biggest accomplishments was increasing those taxes and those checks.

  4. Vinny, what does any of that have to do with the government taking money out of your pocket and putting it in mine?

    As for Alaska, the key is the oil is considered the property of the people of Alaska. Your bank account is not (so far) considered the property of the United States.

  5. To take it a step further, if you have to give up 70 percent of your income to taxes

    This emphasizes a grossly incorrect (but, unfortunately, all-too-common) understanding of how taxation works in this country. Nobody pays anywhere close to 70% of their income in taxes, and nobody did when the top marginal rate was 70%. What you paid was 70% of the excess over a certain amount, after you had taken all of your deductions, exemptions, and credits.

    Today's top marginal rate is 35% (half of the 70% top rate that existed through much of the 60's and 70's).

    Let's look at a fairly worst-case scenario, shall we? Suppose you're single, with no children, and an annual income of $1 million. Suppose further, that you do not itemize deductions, and you qualify for absolutely no tax credits of any kind. And, just for spice, suppose that none of that income came from capital gains.

    Given these assumptions, you get to take a standard deduction of $5,450 (no personal exemption at that high of an income). That leaves $994,550 of taxable income. The 2008 tax code calls for an income tax of 35% on the [taxable] income over $357,700; plus $103,791.75. 35% of ($994,550 - $357,700) is $222,897.50; Add the $103K to that, and you get $326,689.25, an effective income tax rate of 32.7%.

    Now that's an exceptionally improbable income scenario, mind you. It's a total worst-case scenario. The chances of you being single, getting $1 million in income (none of it from capital gains), and having no deductions, exemptions, or credits, are pretty close to zero.

    But now let's get really absurd: suppose every last dime of that million comes from payroll, the most "expensive" (in terms of taxes paid) kind of income, meaning all of it is subject to payroll taxes. In 2008, the first $102,000 in payroll is taxed at 6.2% for social security, adding $6,324.00 to your tax bill. All payroll income is taxed at 1.45% to support Medicare and Medicaid, adding another $14,500. So now your total tax paid is $347,513.25 -- a 34.8% effective tax rate.

    Even in the absolute worst-case scenario, a single guy making a million a year, pays an effective tax rate lower than the top marginal rate.

    With the worst-case out of the way, let's go with something much more realistic. Let's say our single taxpayer has a salary of $250,000. For simple math, we'll say that he's got $250,000 in short-term capital gains income, $250,000 in long-term capital gains income, and $250,000 in other income (e.g., dividends), for a total of $1,000,000 in income. Let's further say that he has a modest (for his income level) $25,000 in deductions, credits, and exemptions (e.g., mortgage interest, health insurance, business expenses, etc.). Also for simplicity, we'll assume no capital losses. From that example:

    One quarter of the income, $250,000, comes from long-term capital gains (profits on stocks held for over a year), which are taxed differently and separately. The long term gains are taxed at just 15%.

    Another quarter, $250,000, comes from short-term capital gains (investments held less than a year), which are taxed as regular income but are exempt from payroll (FICA) taxes.

    The third quarter is also taxed like regular income, and is also exempt from payroll taxation.

    The last quarter is the salary, and that's taxed as in our example above.

    So where does that leave us?

    - The $250,000 of long-term capital gains gets taxed at 15%, $37,500 total.
    - The FICA tax on $250,000 in salary comes to $6,324 for Social Security and $3,625 for Medicaare, totaling $9,949.
    - The $750,000 of "regular income" (including salary, dividends, interest and short-term capital gains), less the $25,000 in deductions, credits, and exemptions leaves $725,000 in "taxable income" for income tax purposes. (($725,000 - $357,000) * 0.35) + $103,791.75 = $232,346.75 in "income tax."

    Summing up:

    FICA tax: $9,949
    Cap. Gains: $37,500
    Income Tax: $232,346.75
    TOTAL: $279,795.75

    Effective federal tax rate: 28%

    I recognize that this is all quite complicated, but it's important, especially when you hear people who don't make anywhere near that kind of money complaining about having to give "half their money" to the government.

  6. Chris,

    Government policy has always been a determinant of what people earn and own.

    If you want to enjoy the benefits of an ordered society, then government regulation and taxation are part of the deal.

  7. Vinny, what does any of that have to do with the government taking money out of your pocket and putting it in mine?

    Actually, the government does very little of that. The only sizable government project that directly gives anyone money is social security, and that's more akin to taking money out of your pocket and putting it back into your pocket at a later time.

    The whole "taxation is just redistribution of income" argument is a bunch of malarkey, and I really need to get around to blogging as such.

  8. TGirsch said: Actually, the government does very little of that. The only sizable government project that directly gives anyone money is social security,

    You've heard of welfare, yes? Trillions of dollars handed out in checks, foodstamps, and free goods/services. Did I mention checks?

    You've heard of "tax credits?" The scheme where people can make a profit on April 15? Obama wants to do more of that.

  9. ChrisB:

    I defy you to demonstrate how the government spends "trillions" of dollars on the types of welfare programs you bemoan. If you're lucky, you might get to double-digit billions. The entire budget of the department of Health and Human Services, which includes a whole lot more than welfare (e.g., veterans benefits), is $69.3 billion in 2008, or about 2.3% of federal spending. Looking at the details, the welfare portion is a whole lot less than that. You'd have to struggle to find $22 billion (0.7%) that's fairly described as "welfare."