Tag Archives: Income tax

The logic beneath the lunacy

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David Frum urges us to look past Republican obstinacy and acknowledge the fact that some of their debt package proposals are better than those put forward by President Obama. He identifies a few here:

Another large tax preference is the home-mortgage-interest deduction. This preference is justified by the claim that it promotes homeownership. Yet Canada, which doesn’t have the preference, has roughly the same home­ownership rate as the United States: a little over 60 percent.

Rather than put more people into homes, the deduction puts the same number of people into more home: before the Great Recession hit, new homes in the United States averaged 2,300 square feet; new homes in Canada, 1,800 square feet.

That’s bad economics: Americans end up borrowing more to buy houses and then cutting back on other forms of saving to make up for it. The deduction is also bad for the environment, because it encourages Americans to commute farther to bigger houses that require more heating and cooling.

Here’s the good news: the deduction has already been trimmed over the past generation. Americans can claim a deduction only on their principal residence and only on a mortgage of up to $1 million. Time to reduce that cap again.

Finally, there’s the deduction of state and local taxes against federal income tax. That costs $80 billion a year, or about the same as the federal Department of Education.

Why doesn’t it trigger a revolution when California raises its state income tax past 10 percent? Or when suburban communities around New York City hike property taxes to an astonishing 8 percent of median local annual income? The short answer: the people who pay the most local taxes also receive the biggest relief on their federal taxes. Ironically, as federal tax rates rise to 40 percent, the highest earners will receive an even bigger subsidy on their local taxes.

By cushioning the shock of local taxes, federal policy induces local governments to spend irresponsibly. New York state, for example, with almost exactly the same population as Florida, spends literally twice as much.

Probably not the best post-election approach

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Utah Senator Orrin Hatch clarifies Mitt Romney’s 47% comments:

Mitt Romney got it wrong: It’s not 47 percent of the nation that is not paying federal income taxes.

“It’s 51 percent!” Sen. Orrin Hatch (R-Utah) said Wednesday.

Hatch, who often talks about the percentage of Americans who don’t have to pay Uncle Sam — aside from payroll taxes — offered that clarification after he was asked whether he has concerns about fallout from a losing presidential campaign in which Romney’s use of the 47 percent figure played a prominent role. Romney argued at a secretly recorded fundraising event that he wasn’t concerned about the 47 percent because they wouldn’t vote for him.

Hatch argued that Romney’s comments “had an effect, but I don’t think much of an effect,” so he was not worried.

He also clarified what he thinks Romney meant and should have said.

“It was distorted because Romney did not explain it right,” Hatch said. “All he had to say was ‘Look, when 51 percent of all households — not just individuals — don’t pay a penny in income taxes, it shows that we’ve got too many people riding in the wagon.’ What he should have said is, ‘I want to get them out of the wagon in good jobs where they can also help pull the wagon.’

“That’s what he meant to say, but he didn’t say it,” added Hatch, who once suggested the poor should pay more taxes. He later clarified that he did not want to tax the “truly poor.”

My humble suggestion to the Republican Party: kindly drop the percentages talk. For a group of people so preoccupied with enumeration, you’d think they’d understand the drop in their own polling percentages.

For the love of all things holy, stop distorting the tax debate

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Pulitzer Prize-winning author Buzz Bissinger has a column today on the Daily Beast titled “Why I’m Voting for Mitt Romney:”

By instinct I still cling to my Democrat roots. But I admit that as I get older, on the cusp of 58, I am moving more to the center or even tweaking right, or at least not tied to any ideology. Those making more than $250,000 should pay more taxes, and that does include me. But I also am tired of Obama’s constant demonization, of those he spits out as “millionaires and billionaires,” as pariahs. Romney’s comments at a fundraiser were stupid, but 47 percent of Americans do not pay federal income taxes. Yes, a majority are poor and seniors. But millions do not pay such taxes with incomes of more than $50,000, and whether it’s as little as $10, every American should contribute both as a patriotic obligation and skin in the game. This is our country, not our country club.

This constant emphasis on the “47 percent of Americans [that] do not pay federal income taxes” is as boring and repetitive as it is completely and utterly irrelevant. The fact that this figure continues to play a large role in our national tax discussion is proof positive of the utter lack of due diligence on the part of journalists around the nation, who’ve collectively abdicated their responsibility to readers by failing to dig deeper.

So for the millionth time, federal income tax rates do not matter. Total tax rates matter. Think about it: what is the central issue in today’s tax arguments? The key question is one of progressivity and fairness: how much, if at all, should tax rates rise with income levels? Should the poor have to pay the same percentage of their total income to their federal, state, and local governments as the rich do? Or should taxes paid to all levels of government rise relative to income, as income itself rises? Responses to this question are as numerous as respondents, and that’s OK.

It’s absolutely absurd, on the other hand, for people to continue basing their tax system preferences on deliberately misleading data. Federal income taxes cover only one portion of total tax liabilities. There are, additionally, payroll taxes, state taxes, and local taxes. And this is the key problem with using only federal income tax rates as indicative of anything.

The Republican Party knows this. It’s why its standard-bearer, Mitt Romney, insisted on the self-victimization of the 47% who don’t pay federal income tax — because it’s a number that sounds incredibly high, a number that advances the GOP’s agenda and lends legitimacy to the accusation of “class warfare” against Barack Obama.

The problem is that, just as one would expect, isolating the most politically advantageous portion of Americans’ total tax liabilities produces a phenomenally distorted piece of data. (Imagine if the Democratic Party insisted its national platform was widely supported throughout the entire nation, based on a poll conducted exclusively among New York City residents. This is an extreme hypothetical, to be sure, but it’s illustrative of the type of thinking being used by Republicans to disguise the truth about taxes.)

So what is the total income and tax intake of Americans? Here’s a helpful graph, courtesy of Mother Jones, that includes 2009 income and tax data:

Notice a couple things. First, the bars are not equally distributed: the first four pairs represent the lowest four quintiles of the American population by income level, while the last four pairs collectively constitute the top 20%. This is necessary because the top income quintile dwarfs the other quintiles, and leaving it in one piece would render the graph more difficult to interpret in a useful way.

Secondly, the share of total taxes paid by each slice of the population is roughly equivalent to its share of national income. In other words, our tax system is much, much less progressive than Mitt Romney & Co. would have us believe. And this is why, when politicians and — even worse — journalists start throwing around numbers like 47%, it would behoove us to look into the data instead of taking it at face value. It also means that, if anyone’s conducting class warfare, it certainly isn’t Barack Obama.

 

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