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Re: Federal income taxes and the poor

Reading the continuing discussion on whether the poor pay enough in taxes, I think people are probably getting increasingly confused. So let's get one thing straight: There's no federal income tax bracket of 0 percent. If you're making income, you're paying taxes on it. Here's a graph showing the 2010 rates:

marginal_tax_rates.png

So how come a bunch of people don't end up sending the government a check? Well, other programs wipe that liability out. To give an example, I bought a house this year. That made me eligible for the new homebuyer's tax credit. That meant that $8,000 got subtracted from my final tax bill, and if my bill was less than $8,000, then the IRS will send me a check in the mail.

There's an argument worth having about the right marginal tax rates. But that's not what people are talking about when they're saying the poor don't pay any taxes. Rather, they're talking about the social support programs that wipe out their income tax liability. That might lead you to say that we should distribute that money differently so people are still paying taxes and their federal help is unrelated to their tax burden, or it might lead you to say that those programs should be smaller so people are getting less help and more of them owe taxes. But then people should argue those points. Talking about all this in terms of income taxes is just confusing the conversation.

By Ezra Klein  |  April 15, 2010; 1:24 PM ET
Categories:  Taxes  
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Comments

Time has long passed when the tax system should have been reformed. There are many easy ways that would eliminate the confusing and lengthy tax code. A VAT or a FLAT tax would be a better system. But, the real problem is the the FEDERAL BUDGET IS TOO DAMN BIG! We need to reduce spending in all programs and pass a BALANCED BUDGET law. Things have gotten out of control.

2010...WITHOUT DOUBT, VOTE THEM OUT!

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Posted by: my4653 | April 15, 2010 1:32 PM | Report abuse

And, of course, people should stop talking about this as if 47% of Americans are getting a free ride. Most of those people are paying state and local taxes and payroll taxes, etc. As Ezra says, there are lots of important and worthwhile policy discussions to be had about tax rates and social programs.

The "debate" that's been going on the last few days, however, is just an excuse for high tax bracket folks to whine at tax time.

Posted by: MosBen | April 15, 2010 1:34 PM | Report abuse

Well, there's kinda a tax bracket of 0%. The personal exemption (and to a lesser extend the standard deduction) is basically the same thing as a 0% tax bracket.

Posted by: usergoogol | April 15, 2010 1:37 PM | Report abuse

Where'd the Corker interview go?

And my4653, any system of taxation, no matter how simple in theory, will get complex over time. Encouraging or discouraging behavior through the tax code is both a tempting and very useful tool at the government's disposal. If you put in a VAT or a flat tax you're not even getting out of committee without charitable deduction exceptions and countless more.

What we need is to have the IRS send pre-completed tax forms to everyone. If you disagree with it you can submit a modified tax form, otherwise you can just sign and return (or efile). There. Simple.

Posted by: MosBen | April 15, 2010 1:39 PM | Report abuse

There's a little gotacha here that might be missed. If you have a tax liability of (for example) $7,000 and a tax credit of $8,000, the IRS does NOT send you a check for $1,000; that is, in most cases, tax credits which exceed tax liability do not result in "refunds" of money not already paid. This topic will come up next year, perhaps raised by small businesses who received tax credits to "offset" the cost of employee health insurance.

Posted by: rmgregory | April 15, 2010 1:51 PM | Report abuse

Nice try, Ezra, and I mean that most sincerely! I get one more day to vent then it's back to my old self.

I can't access it at work but Digby had a great piece last night about the couple getting a divorce in CA and in the process a whole bunch of tax documents are opened to the public and, lo and behold, the one has an income of about 23 million dollars one year and has a federal tax liability of less than zero!

I bring this up because I think democrats (and I am one of them most days) risk misinterpreting what people are actually saying when they bring up the 47% business, and risk alienating a lot of people who otherwise might be on our side!

I think most people understand paying taxes is the price we pay for living in a great country like the United States. The thing is, and this is my issue, I kind of want to have some confidence that other people like me are also paying. I stipulated yesterday the people we think of as free-riding are not necessarily the stereotype - like the CA couple I mentioned earlier!

The guy in the office next to mine brags that he doesn't have to pay any federal taxes. He is a level above me so I know within a certain range what he makes. Likewise my neighbor pays nothing for a variety of reasons I won't go into here. That's what people percieve as being unfair - that there are certain people who don't have the kind of representation that leads to these tax breaks and credits and whatever it is you are calling them and they have to pay high marginal rates. And there are others who have somehow managed to structure their lives to avoid tax altogether. Who pays for the Iraq war? Who pays for the military and the Centers for Disease Control etc etc etc? Shouldn't we all in equal measure according to our means to pay? That is not the way it works and so sometimes people get a little ticked off about that.

Like I said, I will be back to my old self tomorrow, but y'all would be pretty shocked to see what I make versus what I get to take home. I don't want to seem like I am complaining. I've been up and I've been down and up is better for sure.

Posted by: luko | April 15, 2010 2:01 PM | Report abuse

It still seems like a lot of discussion (not in this venue, but on tv news) ignores the way marginal tax rates work, and gives the impression that if you hit x threshold of income, your taxes will suddenly skyrocket.

Posted by: jduptonma | April 15, 2010 2:15 PM | Report abuse

A bit OT, but I thought it should be pointed out that state income taxes can make a big difference in someone's total tax burden. For example, there aren't marginal tax rates in some states. In other words, if you make $1 more than some threshold, all of a sudden your tax rate nearly doubles in say Maine, and it's not a small chunk of change. On the other hand, Florida and NH have no income tax. Even though I hate our income tax system, I will say that it is often more progressive and easier to deal with than many state systems. What is really bad is when you earn income in more than one state with difficult and expensive tax systems and you have to sort it all out. There is a huge cost on society from the complexity of our various tax schemes.

Posted by: AuthorEditor | April 15, 2010 2:25 PM | Report abuse

Information FAIL in my previous post. I didn't mean to say that marginal tax rates don't exist in say Maine, but that the rates nearly double from one threshold to the next in some cases. I think in Maine one jump is from 3.75% to 7% in the next tier. In other words, a small change in income can mean a much bigger jump in taxes.

Posted by: AuthorEditor | April 15, 2010 2:47 PM | Report abuse

The general worry that many people have is that so many people don't care about the tax implications of the spending increases they favor, because they won't be affected by the taxes, but they will benefit from the spending. If a significant majority of people do not feel the pain from tax increases, we will continue to increase spending.

Posted by: staticvars | April 15, 2010 2:49 PM | Report abuse

AuthorEditor - I was suprised to hear that there are states that use absolute rather than marginal tax brackets, so I looked up Maine and discovered that it is true, but that the rates top out at $19,000 of income, so the top rate will apply to most taxpayers - essentially a flat tax. Why they do it that way is about as explicable as the fact that they keep re-electing Snowe and Collins.

In any case, it is certainly true that many (most?) people don't understand how marginal tax rates work. They are under that mistaken impression that if they move into a higher bracket, the new percentage aplies to all of their income. If more people understood how it really works, I believe support for progressive taxation would increase subtantially.

Posted by: Virginia7 | April 15, 2010 2:54 PM | Report abuse

As someone pointed out, there really is a zero bracket. It is $9350 for a single person, which is a $5700 standard deduction plus a $3650 personal exemption. Taxes begin at TAXABLE income of 0, which is whatever your adjusted gross income is minus $9350, or minus an even greater amount if you have bigger deductions, like state and property taxes, mortgage deduction etc. Even more if you have children. Plus dividends and long-term capital gains are taxed at a lower rate.

And marginal rates are exactly that--marginal. They are 10% of the first $8350 of TAXABLE income, 15% of the amount of TAXABLE income OVER $8350, 25% of the amount OVER $33,950; 28% of the amount OVER $82,250 etc. (See page 101 of the booklet.)

Take your total taxes on line 60 and divide it by your adjusted gross income on line 37 to find your effective tax rate; better yet divide by the amount on line 22, your total income. For someone in the 25% tax bracket the effective rate will be more like 12.5%.

Posted by: Mimikatz | April 15, 2010 2:55 PM | Report abuse

Taxes fund our system of government which exists to a great extent to prevent the powerful from mistreating the masses. Does anyone doubt that sans government the nomenclatura would have us all in chains (of some sort). The losses in real income since Reagan are because he scrapped so much regulation which allowed business to drive down wages. This was the beauty of Adam Smith's idea. The rich get richer (because they would anyway) but in our system they must drag the rest of us along because it's the right thing to do. Also sooner or later if they didn't take us with them, we would revolt (French, American & Russian revolutions for example). So these are pivotal times. The upper classes thought they were getting back to unfettered control. Let's see what happens to Blankenship the coal magnate as result of his wreckless indifference to the fate of the lowly miners.

Posted by: BertEisenstein | April 15, 2010 3:17 PM | Report abuse

Reading more about Maine, I just realized they are in the midst of a battle over repealing their new tax reform which sets a flat tax rate at 6.5%, with a big credit for poorer people. They expand the sales tax to more goods and services and raise the rates on some things. Whether or not it is more or less progressive is hard to figure out.

Posted by: AuthorEditor | April 15, 2010 3:19 PM | Report abuse

Interesting that liberals are arguing tax credits are really welfare and social programs rather than part of the tax code, as I believe that was a conserative criticism of the Obama platform. April 15th then is one big welfare day for nearly half of the country? Half of the country is on welfare?

In addition, viewing credits this way could be grounds to argue that when rich people deduct charitable contributions from their income and estate taxes, and instead of reduced taxes the government is matching rich people's donations to charity - that's a lot more taxes paid by the rich. Or the deductibility of interest expense by corporations is really a government investment program and corporate taxes are really higher.

I think it is more honest to state that if when you file your taxes you get back equal or more than what you paid in from the government, then you paid no federal income tax.

Posted by: justin84 | April 15, 2010 4:55 PM | Report abuse

As several people have mentioned, there is, when standard deductions and personal exemptions are considered, actually a group of people who pay no income tax even before credits are applied. I'm well aware of this, because our family has fallen into this "0% tax bracket" more than once.

Having said that, I think what fails to be mentioned in this discussion, and ought to be, is that everyone employed in America is actually paying a portion of their income in federal taxes even if they are too poor to pay any income tax. I don't remember the exact numbers, but I believe social security and Medicare are roughly 9% of pre-tax income. For people at our income level that's a significant contribution.

Posted by: nam7 | April 16, 2010 9:07 AM | Report abuse

To respond to the first commenter, a "flat tax" does not simplify the tax code. When you do your taxes, you input various numbers, add, subtract, mess around with more numbers, and eventually you end up with you "taxable income" -- line 27 on Form 1040A. Then you look up your taxable income on a chart to determine the tax. The only thing a flat tax simplifies is how that chart is calculated. There are two things worth noting about this:

1. The chart is not, in fact, that difficult to calculate, and

2. Even if it took advanced calculus to calculate the chart, who cares? To a person preparing his or her taxes, you're still just looking up a number on the chart (or using a computer to calculate it).

Now, if you want to simplify the tax process by getting rid of various deductions and credits, taxing capital gains and dividends at the same rate as regular income, and eliminating other distinctions that cause all of the actual work in doing one's taxes, that's fine and it would actually make preparing one's taxes easier -- but you can make all of those changes and still have a progressive tax system. The complexity of calculating the taxable income is in no way related to the progressive nature of income tax rates.

Posted by: wolf7 | April 16, 2010 9:37 AM | Report abuse

@AuthorEditor: ".. about Maine .. battle over .. tax reform .. flat tax rate at 6.5% ..expand the sales tax ..Whether or not it is more or less progressive is hard to figure out."

Indeed, it is hard to figure. It is probably roughly a wash in aggregate (though of course not for every individual). Use taxes generally end up being regressive, so its my bet that this change is at least marginally (pun!) so.

The driver for the change is that by raising a greater proportion of revenue through sales taxes it raises money from tourists (known in local parlance as people-from-away) that would otherwise be paid by residents in income taxes - and as you note the middle class was already paying the highest marginal rates, so this does provide real relief to the majority.

We'll see what happens. The tax changes have been passed and signed into law, but have not yet taken effect pending the June "people's veto" referendum. My guess is that the vote will fail and the changes will go into effect - but it will be close.

Posted by: patrickinmaine | April 16, 2010 12:26 PM | Report abuse

Obviously, under any reality-based approach, the people Ezra are talking about are paying zero income tax. He's trying to argue that if you write a positive number and a negative number on your tax form, the Government is actually paying you the positive number and actually taking the negative number back, but of course that's not what really happens. Ezra's trying to cloud a relatively simple issue, presumably for political reasons.

He's better off sticking with the point that the poor pay other taxes, which is undeniably true.

Posted by: tomtildrum | April 16, 2010 3:03 PM | Report abuse

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