We are seeing crazier and crazier tax plans being suggested by republicans because people want something simpler. However, the proposed plans trade fairness for simplicity. How do we talk about this issue and get people to understand it well enough to make the correct decisions?
Most Politicians are quick to lament that the tax code is too complicated and that we need to simplify it (usually by implementing a regressive tax policy). By getting people to agree and assume that the current system is too complicated and incomprehensible most people do not bother to compare the proposal to the current structure. So how do we make the current structure easier to digest.
Tax Brackets
2011 income tax bracket: existing vs. proposed
Let's start with the brackets themselves. Most people have no Idea what tax bracket their income places them in and looking at the 2011 divisions I doubt anyone can remember off of the top of their head.
Consider these 2 statements about raising the tax rate for top earners:
Statement 1:
I think that it is fair for us to raise taxes on earned income over $400,000
Statement 2:
I think it is fair that people who make over $383,350 pay more in taxes
There are 2 things that I want to point out about the differences in these statements.
1. $400,000 is easy to remember and it rolls off the tongue, there is very little confusion about this. I had to look back 3 times at the actual value of the top bracket when writing it in the blog. If we are competing with people who are proposing a flat tax of 20% we need more digestible numbers. Right or wrong we need to be able to speak simply about this issue.
2. This is more subtle but just as important. In the first statement I said "on earned income over $400,000" which more clearly conveys that if you make $410,000 in earned income you will pay higher taxes on $10,000 over $400,000. The second statement (which is what politicians and pundits say) implies that someone who makes more that $383,350 will have to pay higher taxes on their whole income (not true)
Fairness
Many times the issue of fairness is introduced when discussing taxes and Tax Burden. Sadly very few people have made a case for the Fairness of tax brackets. The truth is that we all pay the same income tax on the first amount of money that we earn. Unfortunately for a lot of people that is all that they earn. The reason that we tax the first portion of money earned at a lower rate is because that is the money that is essential for a minimum standard of living (buying food, paying rent, buying clothes, health care, etc.). As we earn more money we are then able to afford more luxuries and more importantly we have money to invest and make money from our money.
The basic idea around taxing the higher end of income at a higher rate is that the earner is more capable of sacrificing the money. Their needs are met with the income they earned at the lower tax rate.
Talking Points
I believe that all Dems starting with President Obama need to repeat the following statement over and over.
All Americans pay the same Tax rate on the first $9,000 - $17,000 depending on whether they are single or married. From there everyone pays the same rate as they climb through the tax brackets. Those Americans who are fortunate enough to earn more than $383,000 (this is where even numbers helps so I have rounded) they pay 39.6% on that income. Thanks to all of the generous tax credits and deductions that are available most people have to earn quite a bit more to actually land in that bracket.
The most important thing in here that needs to be repeated over and over is that ALL AMERICANS pay the same tax rate on the first level of income. It helps diffuse the talking point of "why should I pay more taxes than everyone else"
Bonus Point
It is worth reiterating that everyone pays the same rate on the first level of income and include some good anecdotes about it
Average CEO
The average CEO earns $11,400,000 but on his/her first $9,000 dollars he/she pays 10% tax for the first bracket. They don't focus on the tax rate for that bracket because they have moved on to the next bracket after about 2 hours of work (4 if they are married). The average CEO is in the highest bracket after only 8.5 days
Summary
There is obviously a lot to say on this topic and it is an issue that can get pretty heated pretty quickly. So what do you have to say about it? How can we talk about the issue in a simple straightforward way? Is it unreasonable to ask people to pay more on the higher end of income? Of course we haven't even touched on tax loopholes and the ways the wealthy are able to dodge taxes, that is a topic for another blog and someone with more tax knowledge than I ;)
9:05 AM PT:
Update
I accidentally used a proposed tax bracket for 2012 rather than the actual current brackets as pointed out. The source for the brackets is here. The concepts should be the same however ;)