Friday, May 25, 2012

Are We Taxed Too Much, Not Enough, or Just Right?

I read this piece about tax anorexia with interest. Tim O’Reilly, who I see as a “thinker” in the world today, references a blog at Reuters by Chrystia Freeland. If you look at percentages, Obama is spending less as a percentage of GDP than previous Presidents and our taxes are a lower percentage of revenue.
However I, and many others, don’t care about percentage of GDP. I care about percentage of the Jones’ budget. Last year I was near the top tax rate of 35%, paying a marginal rate of 33% on the last bit of income earned here. I’m always amazed how people are confused about marginal rates (see below), but the point is I’m concerned about what I pay.
If I scan through the brackets at the Tax Foundation, you can see that the current brackets today are:
  • 10
  • 15
  • 25
  • 28
  • 33
  • 35
That last bracket kicks in when you make $373k a year, adjusted gross, so more like $500k raw. If you make that much, good for you, and shut the hell up about your taxes. The 33$ is just over $200k AGI, or more like $300k gross on your paycheck. That’s still a ton of money.
If you go back, in 2003 we lowered that top bracket from 38.6% to 35%. Actually the brackets were
  • 10
  • 15
  • 27
  • 30
  • 35
  • 38.6
So the changes are:
  • 0 (no Bush tax cut for the lower incomes)
  • 0 (no Bush tax cut for the lower middle incomes)
  • 2% (middle class)
  • 2%
  • 2%
  • 3.6%
We gave the biggest tax break to the richest people, who work hard, and sell a lot of services, but I’d argue they often don’t add a lot to the country. They may increase the GDP, but often their prices are very high, or they’ve grown a lot of stock value, or they are taking advantage of government breaks in various areas to make this much money. I’m not sure they are really helping the country as a whole.
If we switch back to 2001, we find a slight change. There was no 10% bracket before 2002. In 2001, we had:
  • 15%
  • 27.5%
  • 30.5%
  • 35.5%
  • 39.1%
So a there were two drops under George W. Bush, which I hadn’t realized. Note that the 15% used to go from $0 - $27,050 (Single filers) and the 10% became $0-$7,483 in 2002. The 15% adjusted up to $34,861, which gave a little more relief to people in the mid 5 figures of income.
Interesting, if we go back to George H Bush, we had fewer brackets. 1992 saw brackets of 15%, 28%, and 31% before he had to raise taxes. In 1990 we had 15% and 28%. Arguably extremely low taxes for everyone.
1986 saw the largest number of brackets I saw on a quick flip to that point in time (going backwards):
  • 0% (up to $2,480 AGI)
  • 11%
  • 12%
  • 14%
  • 15%
  • 16%
  • 18%
  • 20%
  • 23%
  • 26% ($19,640-$25,360)
  • 30%
  • 34%
  • 38%
  • 42%
  • 48%
  • 50% (above $88k)
Rather steep rates. More payments at the lower end, capturing federal taxes from lower incomes, but very steep rates for anyone making over $88k. That’s about $185k today. A fairly high income even today. $50k back then, is about $100k now, and that would have been in the 42% bracket.
However if we go back to pre President Reagan, we find these rates in 1981
0% (up to $2,300)
  • 14%
  • 16%
  • 18%
  • 19%
  • 21%
  • 24%
  • 26%
  • 30%
  • 34%
  • 39%
  • 44%
  • 49%
  • 55%
  • 63%
  • 68%
  • 70% (over $108K, or $273k today)
Steep rates, and definitely higher than today.
In the 70s, I saw more brackets, 25 at one point, but topping out at 70%. I’d definitely argue that anything above 50%, and even at 50%, that’s not fair. This is the land of opportunity, and if you do well, even with some breaks, I dislike the idea that your marginal rate might be over 50%.
We ended a top rate of 77% in 1964. Before that, you could pay more than 3/4 of your income. In 1963, under Kennedy, you could have paid a top rate of 91% if you made more than $400k, with brackets going down to 75% at 100k (there were 6 brackets in between). Clearly high taxes.
There were brackets of 92% in the 50s, and 94% in 1945, when WWI ended. That was a change as before that the 90% brackets were for those making millions. It lowered to 200k in ‘45. The 30s saw taxes at 78% at the top, jumping up in ‘32 (New Deal time) from a high of 25% in ‘31. Before that, in 1924 we had a top bracket of 46%, which was lowered in the second half of the 20s. The early ‘20s had brackets of 73%, which jumped in 1917, presumably to finance WWI. The oldest tax brackets in the 1913-1916 show marginal rates up to 7% only.
So are taxes high? I’d argue that right now they are a little lower than average, though perhaps not too low. The highest periods of taxes seem to correspond to wars, yet with two mini-wars across the last decade, we haven’t raised taxes.
The high boom periods of the early 80s and 90s seem to correspond to tax decreases, so I can understand the evidence for lower taxes. However we have had other booms, including the post WWII boom, where taxes were much, much higher.
If you look at unemployment compared to GDP, there is a slight inverse correlation (high unemployment to low GDP), but not a lot. As I scan the graphs (GDP first, then unemployment) it seems as though unemployment is more cyclical and likely there are much more complex reasons for its change.
What does this mean?
Who knows. I mean seriously, who really knows? I agree with Dr. Ron Paul that for the most part the Fed, and policy makers don’t know how to manage the economy and they have limited effect. I’d argue that tax rates fall into this range as well. We don’t really know that lower taxes will result in a better country. Some people will make more money, but I’m not sure they’ll create jobs or benefit the overall country.
My vote: Raise taxes slightly on AGIs above $100k. That means you are likely making in the $120-$200k/year or more. Put ALL that money towards the debt, and by all, I mean all. Reduce spending slightly, similar to the Paul Ryan budget, but reduce military expenditures as well and close all the bases overseas. Bring our troops back to the US. Fund social security, and leave the money alone. If it grows into a surplus pile, leave it.
Then talk about reducing taxes, as we reduce the burdens on our future generations.

Marginal Taxes

I’ve seen someone making $69,500 say they paid 25% in Federal taxes. The bracket for 25% is from 69k-$137,300 for 2011, but you wouldn’t pay $17,375 (25%). You’d pay $13,500 (19.4%). The 25% is only on the $35,000 over $34,500.
The amounts before that are taxed at 10% (up to $8500), 15% ($8,500-$34,500), and then 25% up to $69,500. If you’re married, the amounts change dramatically as the 15% bracket goes to $69k. One reason why marriage equality is an issue.
Marginal taxes make a bigger difference when you are just over one of the brackets since you can end up paying more tax than someone making less than you.

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