January 10, 2010

An Eye Opener About Taxes

(Click on pictures to see larger image. Also, click on the Taxation link at the top of the blog to see the actual numbers from the IRS.)

Remember when Bush cut taxes and Al Gore was running around talking about how the tax cuts only benefited the top 1% of wage earners in this country? Well, aside from being a flat out lie (it was an across the board tax cut), the numbers would show there is a reason the top 1% "benefited" more than the rest. It is because they pay more! According to the IRS, the latest numbers (as of 2007) show that the top 1% of wage earners are paying a very hefty part of the income tax bill for all Americans. But, is it right that they benefit more, in the sense that the tax cuts were designed to solely give the rich more money? Well, let me create a scenario.

(For the purpose of our scenario, we will assume a 15% tax bracket for Person A and a 35% tax bracket for Person B; we will also assume a ficticious tax cut of 10% across the board as well as each person filing as single). Person A makes 20k a year while Person B makes 350k a year. Before the tax cut, Person A would owe $3,000 in income tax for the year. Person B would owe $122,500 in income tax for the year. Even before we enact the tax cut, we obviously see Person B is paying much more in taxes. However, for our argument, let's cut taxes!! The bells of heaven just rang and doves are flocking all around. Spring is in the air and the economy is roaring - yes, all because we cut taxes! So, now Person A has a 5% income tax responsibility and they now owe $1,000 for their income tax. That's a $2,000 savings! Person B has a 25% income tax responsibility now (remember, we cut taxes 10% across the board) and they owe $87,500 for their income tax. That's a $35,000 savings!

OK - question - who benefited more? In pure tax savings, who benefited more? The rich did! Were these tax cuts designed to help out the rich? No - they were fair and even. But, naturally, if one person pays more than the other, any tax break would cause the person who pays more to feel more relief. So, yes, it is fine to say they benefited the Top 1%. But, that's an analytical approach, which is foreign to the mind of Gore. He was twisting this to make a political pander to the less fortunate that he claims he fights for.

But, notice the second chart. 97% of the TOTAL FEDERAL INCOME TAX BURDEN is carried by the Top 50% of Wage Earners. Half of the wage earners in this country are expected to shoulder 97% of the tax burden. On the flip side, a wimpy 3% of the Federal Income Tax burden is shared by the Bottom 50% of wage earners. And, a good number of the Bottom 50% don't pay taxes anyway! Now, if you were in college and had a lecture class for Biology and the class was 200 people. Let's say the grade was determined by an entire class effort. In other words, you didn't receive a grade based on your individual work, but you received a grade based on the work submitted by the entire class. If you were in the top 100 students, how would you feel if you had to shoulder 97% of the work? You'd probably feel like you were being cheated and would promptly expect the Bottom 100 students to pick up their share of the load. Why then, do we not expect the same in the world of taxes?

Just remember this when you are filing this year. It should make it much more enjoyable of an experience!

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