I've never understood why Democrats have stood by and let Republicans frame the tax debate with a few demagogic slogans. Many of the voters Tom Frank wrote about have no idea what their tax rate is. I'll attempt to make it clearer:
I've invented a married couple. These are my assumptions:
* They make $100,000 combined and file jointly.
* Their home is fully mortgaged home at the local median price.
* Their mortgage is at 6% interest fixed for thirty years.
* They have two children.
NB: I've made conservative assumptions. I haven't allowed anything for charitable giving or any deductions other than mortgage interest and property tax.
There's one thing it is necessary to understand when reading this. Being in a tax bracket does not mean that you pay taxes at that rate. Bill Gates only pays 10% on his first $7500 of income, and 15% on the next $23,000 after that. Look at the bracket tables that are linked later in this post.
My couple's annual tax bill for federal income tax is under 9%. Check it yourself.
It's true that they are in the 35% tax bracket. But if you look at the federal income tax brackets, even with no deductions $100,000 is taxed at a rate of 23%. By the time you add up 4 personal exemptions ($14,000) and interest and property tax deductions ($13,000) you're only being taxed at a rate of 8.94%.
OK, but what about Social Security taxes? OK, there's another 6.5% for a total federal bite of 15% on your $100,000. Keep in mind that if you reach the average life expectancy of Americans, you will receive a lot of your social security money back. My married couple, which consists of one earner making $65,000, and one earner making $35,000, can expect to recover $405,000 in Social Security Income if they reach the average life expectancy. If it were one earner making $100,000, they could expect to collect $312,000 over the same period.
OK, but what about people making lots of money. Well, someone making $500,000 per year pays about 25% in federal taxes. Their Social Security contribution comes to about 1.35%, since they stopped paying it at about $97,000, which brings their total federal bite to about 26.5%. They're in the 35% bracket, too. I'm sure that I have wildly underestimated their deductions. I have tripled the mortgage on their house from the $100,000 example(If they don't have one, they're either stupid or don't really care about the money). They probably pay hefty property taxes on their homes, and they very probably give a material sum to charity. But I haven't included that in the calculations, thus skewing their tax bill higher than what it probably is. Using my examples, a person with a half million dollar a year income earns 500% more than a person with a $100,000 income, and pays federal taxes at a rate of 11% higher.
And oh, I forgot: They also have $375,000 dollars left to buy stuff. Yes, I know, they buy food and pay electric bills and property taxes. As does everybody. And they do it proportional to their income and ability to pay for it. Because they're smart. That's how they got to make half a million a year.
Note: Some people who make $500,000 dollars a year, because of certain exotic investments which in years past were used to evade federal taxes entirely, are forced to pay an Alternative Minimum Tax, or AMT. At the time the AMT became part of the tax code, it only applied to the highest salary earners; but because it wasn't indexed to inflation, it is now beginning to harmfully affect people squarely in the middle class.
This has been mainly a math exercise. I'd be happy to fight over how much is too much, where the tax money should be going, and what's gained for what's paid. Until someone responsible recognizes that throughout American history, until George Bush, raising taxes when it was called for was the responsible thing to do, we're going to argue more and more about whether an extra 5% tax on people making over $250,000 is a hardship. And no matter what side of that argument you take, to paraphrase Barry Goldwater "In your heart you know that's bullshit." - Pat 5/15/2008