A Philosopher's Blog

Tax Rates

Posted in Business, Ethics, Law, Politics by Michael LaBossiere on February 17, 2012

The Tea Party made a lot of noise about our being Taxed Enough Already. While I am sometimes cast as a liberal, I am actually a fiscal conservative and I agree that many of us are taxed enough-if not too much. However, I also contend that some of us are under-taxed in a way that causes the rest of us to be over-taxed, which is probably one reason I get branded as a liberal.

A typical person, say a teacher, who makes $50,000 a year gets taxed at an effective rate of 17.2%. Mitt Romney gets taxed a bit under 15%, mainly because he and his lobbyist cohorts saw to it that the tax laws benefit his sort of people rather than the folks who earn a paycheck. Of course, even Mitt is paying a modest piece of his income compared to some others.

According to the IRS and Citizens for Tax Justice certain industries have managed to get rather desirable tax rates. Aerospace and defense companies are doing very well, having an average tax rate of 1.6%. The telecommunication folks are worse off at 7.5% and the often vilified folks in petroleum and pipelines are taxed at an effective rate of 13.1%. Above that are the utilities who are hit hardest at 14.4%. Of course, some clever folks at the top companies have worked out the means of paying no taxes (most famously GE).

Tax

Tax (Photo credit: 401K)

A rational, objective look at the numbers shows that the claim that companies are overtaxed seems to be untrue. After all, they are taxed at a rate less than a person who earns $50,000 by working. Of course, it could be contended that everyone is being overtaxed and that the people who work for a living and do not have armies of well paid lobbyists and lawyers are being brutally overtaxed. If so, it would seem that the focus should be shifted from trying to rescue the corporations from the cruelty of their relatively low effective tax rate to rescuing the working people from their much higher tax rates. After all, corporations have been enjoying record profits and CEO compensation is most excellent while the middle class is generally struggling or sinking into the lower class.

Naturally, there has been some talk about helping out the middle class. However, while politicians have bent over backwards after being slathered with cash from the corporate lobbyists, little has been done for the middle class. Given that the middle class lacks the unified cash to hire lobbyists and lawyers, this is hardly a surprise. However, the pain of the middle class can be cleverly exploited. After all, if we feel hurt by our taxes, it is usually easy to get some of us to shed tears for the corporations on the assumption that if we are being cruelly taxed, then so are they. Of course, this is not true-they are doing quite well.

As far as what to do, the usual call from conservatives has been to lower spending to address the problem of deficits. While that is a reasonable idea, there is the obvious question of whether or not these cuts will be best for the country. After all, we could also address the deficit by increasing the taxes paid by the very wealthy to match those paid by the middle class in terms of percentages. That is, if folks like Buffet were taxed at the same rate as their secretaries, then there would be considerably more revenue while the rich would still remain rich.

It might be objected that taxing the rich at this rate would be harmful. However, the obvious reply is that if someone who makes $50,000 a year can manage to survive while being taxed at 17.2%, someone who makes $ 50 million a year can also survive at that tax rate or even higher.

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37 Responses

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  1. T. J. Babson said, on February 17, 2012 at 9:25 am

    Totally misleading post that confuses the difference between overall tax rate and marginal tax rate. In 2009, people earning between $40,000 and $50,000 paid an average of $2,397 in taxes, for a tax rate of about 6.7%.

    Source: http://www.irs.gov/taxstats/indtaxstats/article/0,,id=96981,00.html#_grp1

    • anon said, on February 17, 2012 at 11:41 am

      This confusion happens everywhere :(

      At least link to the actual page with the file you have to download (is this it http://www.irs.gov/taxstats/article/0,,id=175800,00.html)

      I like how for those earning 10million or more, the average tax % is less than that of those earning > 500k and < 10 million. The decline in % for the rest are "okish", not sure why some of the lower brackets have higher %'s than ones just a bit more. Probably because the larger ones (its not much more though, relatively speaking) have more % to spend on something that can be deducted? I wish it had more historical data to compare to.

  2. T. J. Babson said, on February 17, 2012 at 10:40 am

    This is why the Democrats would prefer to talk about contraception.

    But at some point we wish everyone – the political class, the media, taxpayers of all ideologies – would just accept this as a given: As a nation, we can’t continue spending vastly more than we take in. The Obama plan, if enacted, would add $901 billion to the national debt. This is less than in recent years but still enormous on a historical scale – the U.S. spending 31 percent more than it receives in revenue.

    A household that for years on end spent 31 percent more than it took in would soon be spending more on interest on debt than on most priorities. As a nation, we are already there. In 2010-11, the federal government spent $454 billion in interest on the national debt – 12 percent of the entire budget. That’s only going to go up, up and away unless deficits are finally, substantively addressed. We wish the immensity of this problem would finally sink in – with everyone.

    http://www.utsandiego.com/news/2012/feb/15/its-math-not-politics-vast-debt-a-killer/

    • anon said, on February 17, 2012 at 11:22 am

      This is why the Republicans would prefer to talk about contraception/gay marriage/anything but actually coming up with a real financial plan that consists of something other than “lower taxes” and “cut everything BUT defense”. Smart people realize that the fewer people you have, the fewer people you need to take care of. The fewer unwanted/unloved people you have, the fewer people that will probably need assistance in the future since they will have loved ones that will help out/are able to help out.

      Sorry but that article IS missing the picture and this issue IS mostly about politics. Do we spend more than we take in, yes. If you, personally, are spending more than you take in which of the following scenarios would you do (in all scenarios spending IS cut):
      1) quit your job/take a job with less pay so you have less money coming in
      2) find more ways to earn/get money
      3) “stay the course” in regards to your job/earning money
      4) take loans and hope you can pay them back in the future

      All but the dumbest people can see that option 1 is fundamentally stupid (and amazingly, its the republican plan) and option 4 isn’t that great (but unfortunately has been the plan for a long time for BOTH political parties).

  3. T. J. Babson said, on February 17, 2012 at 11:36 am

    This is from January 8th. Contraception was never an issue until George Stephanopoulos brought it up out of nowhere in a debate. You think this is a coincidence?

    During Saturday’s Republican presidential debate in New Hampshire, hosted by ABC, co-moderator George Stephanopoulos bizarrely pressed candidate Mitt Romney on whether the former Massachusetts governor believes the U.S. Supreme Court should overturn a 1965 ruling that a constitutional right to privacy bars states from banning contraception.

    Romney, befuddled by the off the wall nature of the question on such an issue that is not on any state’s legislative agenda, eventually observed that it was a “silly thing” for the ABC co-moderator to ask such an irrelevant question. Stephanopoulos’s odd persistence which dragged on the discussion with Romney for more than three and a half minutes inspired a number of boos from the audience before Ron Paul and Rick Santorum were then allowed to weigh in.

    Read more: http://newsbusters.org/blogs/brad-wilmouth/2012/01/08/debate-abcs-stephanopoulos-presses-romney-contraception-ruling#ixzz1meaqAPp6

    • anon said, on February 17, 2012 at 11:44 am

      “Contraception was never an issue…”

      Do you seriously believe that?

      • T. J. Babson said, on February 17, 2012 at 12:03 pm

        Yes. No one is proposing to change the law regarding contraception except Obama.

    • Michael LaBossiere said, on February 17, 2012 at 12:02 pm

      It is a bit odd that he would ask Mitt, after all Mitt is not really a social issues guy. Santorum has said things about contraception in the past, so it would make some sense to ask him about it.

      No doubt the liberal media was commanded by Obama to make it an issue. After all, the Democrats are cunning masters of Machiavellian political intrigue.

      • T. J. Babson said, on February 17, 2012 at 12:11 pm

        “After all, the Democrats are cunning masters of Machiavellian political intrigue.”

        More masters of the media.

        • Michael LaBossiere said, on February 17, 2012 at 4:11 pm

          Indeed, their powers are shocking. Just four years ago they got Obama elected and then used their cunning powers to get routed in the next round of elections. No doubt to confuse and confound the Republicans with the distraction of victory. :)

      • Anonymous said, on February 17, 2012 at 1:20 pm

        “After all, the Democrats are cunning masters of Machiavellian political intrigue.”

        They are? I’ve never thought or said that. Most of them are misguided, political hacks. Of course a few of them are capable of Machiavellian tactics, but mostly I see them as populist creatures leading us down trhe path of Greece.

        Magus

        • dhammett said, on February 17, 2012 at 4:09 pm

          That path would indeed be a slippery slope! Greece—grease :) Get it? Heh.

        • Michael LaBossiere said, on February 17, 2012 at 4:13 pm

          Admit that you secretly fear the cunning power of the Democrats and it will set you free. :)

    • T. J. Babson said, on February 18, 2012 at 9:26 am

      Mark Steyn:

      Instead, the Democrats shriek, ooh, Republican prudes who can’t get any action want to shut down your sex life! According to CBO projections, by midcentury mere interest payments on the debt will exceed federal revenues.

      For purposes of comparison, by 1788 Louis XVI’s government in France was spending a mere 60% of revenues on debt service, and we know how that worked out for His Majesty shortly thereafter.

      Not to worry, says Barry Antoinette. Let them eat condoms.

      This is a very curious priority for a dying republic. “Birth control” is accessible, indeed ubiquitous, and, by comparison with anything from a gallon of gas to basic cable, one of the cheapest expenses in the average budget. Not even Rick Santorum, that notorious scourge of the sexually liberated, wishes to restrain the individual right to contraception.

      But where is the compelling societal interest in the state prioritizing and subsidizing it? Especially when you’re already the Brokest Nation in History. Elsewhere around the developed world, prudent politicians are advocating natalist policies designed to restock their empty maternity wards.

      A few years ago, announcing tax incentives for three-child families, Peter Costello, formerly Geithner’s counterpart Down Under, put it this way: “Have one for Mum, one for Dad, and one for Australia.”

      But in America an oblivious political class, led by a president who characterizes young motherhood as a “punishment,” prefers to offer solutions to problems that don’t exist rather than the ones that are all too real.

      I think this is what they call handing out condoms on the Titanic.

      http://news.investors.com/Article.aspx?id=601602&ibdbot=1

      • Michael LaBossiere said, on February 18, 2012 at 1:54 pm

        The social issues can be seen as ruse to win over the lower class people who would otherwise realize that the Republican agenda is largely not in their interest. As such, they are rather pleased when the Democrats decide to stir up such things.

        It is unfortunate that social conservatives and fiscal conservatives are both called conservatives and are seen as being one in the same. However, there is no necessary connection.

  4. T. J. Babson said, on February 17, 2012 at 1:01 pm

    Why do guys want to tax income, anyway? Why not tax consumption? If you want to tax the rich, tax second houses, expensive cars, boats, property. This makes more sense in my opinion.

    • Anonymous said, on February 17, 2012 at 1:17 pm

      A consumption tax makes much more sense. VAT.

      Magus

      • dhammett said, on February 17, 2012 at 4:14 pm

        Consumption tax. Heh. That way the Biggest Loser becomes the biggest winner, for, in the end he pays lower taxes? Fat guys carry the load. Heh.

    • Michael LaBossiere said, on February 17, 2012 at 4:13 pm

      Sensible. That way people would, in effect, select their own tax bracket by what they buy. Of course, it would be wise to ensure that the taxes on basics did not get too high.

  5. T. J. Babson said, on February 17, 2012 at 2:45 pm

    Your tax dollars at work. The CEO of GE is one of Obama’s cronies. For $490 million 35 new jobs were created. Are we winning the future yet?

    When it comes to breezy U.S. wind shenanigans, Robert Bryce, a senior fellow at the Manhattan Institute, believes that General Electric’s Shepherd Flat project in northern Oregon is worst in blowing lots of taxpayer resources. Not only did the Energy Department give GE and their partners a $1.6 billion loan guarantee, but as soon as the turbines start running, the Treasury Department will ante up an additional $490 million cash grant.

    According to plan, an important intent of this charity is to create 35 permanent new “green energy jobs”. Focusing upon just the $490 million cash grant alone, some skeptics may question whether the taxpayer cost of $16.3 million for each of those jobs might be just a little bit steep.

    The Shepherd Flat deal is so lucrative for investors that even some of President Obama’s top advisors including former energy policy czar Carol Browning and economic advisor Larry Summers thought it was lousy. Their October 2010 memo observed that the project backers had “little skin in the game” while the government would be providing “a significant subsidy (65+ percent).” The memo went on to say that while the sponsor’s contribution amounted to only about 11 percent of the total cost, they would receive an “estimated return on equity of 30 percent.” It also explained that the carbon dioxide reductions associated with the project “…would have to be valued at $130 per ton for CO2 for the climate benefits to equal the subsidies…more than six times the primary estimate used by the government in evaluating rules.”

    http://www.forbes.com/sites/larrybell/2012/02/16/you-thought-solyndra-was-bad-theres-more-on-the-way/

    • Michael LaBossiere said, on February 17, 2012 at 4:17 pm

      GE has won the future. They have managed to get their way in most things-they are, in many ways, the ultimate corporation.

  6. T. J. Babson said, on February 17, 2012 at 4:17 pm

    Running the numbers…

    Emmerich analyzes disposable income and economic benefits among several key income classes and comes to the stunning (and verifiable) conclusion that “a one-parent family of three making $14,500 a year (minimum wage) has more disposable income than a family making $60,000 a year.” And that excludes benefits from Supplemental Security Income disability checks. America is now a country which punishes those middle-class people who not only try to work hard, but avoid scamming the system.

    http://www.zerohedge.com/article/entitlement-america-head-household-making-minimum-wage-has-more-disposable-income-family-mak

  7. FRE said, on February 17, 2012 at 4:52 pm

    Sometimes it is overlooked that some of the income earned by corporations is taxed twice. The corporation pays a tax on the income it earns and the portion of it that is distributed as dividends is taxed as income by those shareholders who receive the dividends. Smaller companies with a limited number of shareholders can avoid that double taxation by converting to subchapter S corporations in which case, for tax purposes, they are treated as partnerships. The double taxation of corporations may not be all bad since it encourages them to invest in new plant and equipment which can increase efficiency and boost employment.

    I assume that a consumption tax would be similar to a sales tax. That has been determined to be regressive in the sense that lower income people would pay a higher percentage of their income in taxes than would higher income people.

    • T. J. Babson said, on February 17, 2012 at 7:01 pm

      FRE, let’s say you decide to tax second houses at 5% of their worth per year. How does that hurt the poor?

      Or you could add a 30% tax on whatever a car costs beyond $30K. The idea is to have modest taxes on the basics and heavy taxes on luxuries. I don’t see how this hurts the poor, and if a rich guy does not want to pay tax he can live like an ordinary person.

      • Michael LaBossiere said, on February 18, 2012 at 1:45 pm

        Clearly luxury taxes would not hurt the poor since they would not be buying second houses or $30K cars. However, since the rich generally have more influence than the poor, it would be surprising to see such taxes put into place.

    • Michael LaBossiere said, on February 18, 2012 at 1:44 pm

      That is an important concern about consumption taxes. After all, if there is (for example) a 10% extra tax on electronics, while the rich will be buying more stuff, that 10% will be more of the poorer folks (that is, us) income.

  8. FRE said, on February 17, 2012 at 7:40 pm

    T.J., taxing second houses could perhaps hurt the poor by reducing the demand for second houses, the number of people required to build houses, and the number of people required to maintain them. That’s something I hadn’t actually thought about. On a second house worth $1 million, a 5% tax per year would be $50,000 per year. A higher tax on expensive cars would presumably reduce the demand for expensive cars. How great an effect taxing these items would have on demand I’m not sure; the benefits could outweigh the anti-benefits.

    I had assumed that a consumption tax would be the same for all items. If it were applied only to luxury items, then it would not be regressive and might not be unreasonable, although administering it could be difficult. If price determined whether an item is a luxury, then the price at which an item becomes a luxury would periodically have to be adjusted for inflation else eventually even people of modest income would end up paying luxury taxes. However, a similar problem exists with a graduated income tax. Determining the incidence of a tax can be difficult.

    Wealthy people typically spend a lower percentage of their income on consumer goods; they tend to invest more which, of course, can be beneficial to the economy. Thus, it would be harmful to have an income tax which would tax them at excessive rates, but that does not mean that they should not be taxed at a somewhat higher rate than people of modest incomes.

    When there is insufficient aggregate demand for goods and services to justify investment (which is our present situation), then taxing high income people at a higher rate will not have an effect on investment. Thus, in the current state of our economy, a somewhat higher tax rate in the wealthy should not damage the economy and, at least to some degree, it would reduce the budget deficit.

    • T. J. Babson said, on February 17, 2012 at 11:29 pm

      FRE: Do you agree the the US already has the most progressive tax system of any country? Why, when we already tax the rich harder than any other nation, do people think the rich don’t pay their fair share?

      Here is the evidence:

      Income taxes in America are more progressive than in other rich countries–according to an authoritiative official study which, to my knowledge, has not been contradicted. The OECD’s report “Growing Unequal”, on poverty and inequality in industrial countries, includes a table that provides two measures of income tax progressivity in 2005. This is evidently the source of de Rugy’s numbers. Here they are in an excel file. According to one measure, America’s income taxes were the most progressive of the 24 countries in the sample, except for Ireland. According to the other, they were the most progressive full stop. (A more recent OECD report, “Divided We Stand”, uses different data, a smaller sample of countries and a different measure of progressivity: the results are similar.)

      **********************
      Why, according to the OECD, is the US system so progressive? Not because the rich face unusually high average tax rates, but because middle-income US households face unusually low tax rates–an important point which de Rugy mentions and Chait ignores.

      http://www.theatlantic.com/business/archive/2012/02/us-taxes-really-are-unusually-progressive/252917/

      • Michael LaBossiere said, on February 18, 2012 at 1:50 pm

        Well, the cap for salary is 35%, capital gains is 15%. But, when you look at what the big dogs pay (GE, for example) the actual % is lower. Romney pays a lower % than I do, although he makes more in a day than I do in 9 months of teaching (thanks to budget cuts, that is all I get these days-in the summer I am a freelance writer and handyman).

        Interestingly, Rick Santorum pays about 25%-he gets his money from non-capital gain areas. So, I would be inclined to say that the taxes on income from “work” is rather high, but that the tax on capital gains is rather low. Of course, that is the way Romney and his ilk lobbied it-showing that capital talks.

        It is rather amusing to see Newt and Rick complaining about how Romney is outspending them and how, as little millionaires, they cannot match his bigger money friends.

        • T. J. Babson said, on February 18, 2012 at 7:00 pm

          “Romney pays a lower % than I do”

          Mike, if you divide the tax you pay by your AGI, I’ll bet you pay about 6%, which is less than 1/2 of what Romney pays.

          • Michael LaBossiere said, on February 20, 2012 at 2:13 pm

            In 2011 I made $56,750 (salary, royalties and capital gain dividends). My federal tax (excluding SS, etc.) was 7,555. So, I guess I did pay a smaller percentage than Romney. Not 6%, though.

            I mistakenly considered my SS taxes and Medicare taxes in figuring out my rate, but presumably Romney left those out as well.

            So, I owe Mitt an apology. While it is true that he makes more per day than I make per year, I do pay a slightly lower % of my income in taxes. This, I think we can all agree, shows that the tax system is both fair and balanced.

            • T. J. Babson said, on February 20, 2012 at 8:25 pm

              In 2009, people making between $50,000 and $75,000 paid, on average, $4133 in taxes, or about 6.7% of their AGI. See http://www.irs.gov/pub/irs-soi/09in31mt.xls Cell W18

              I don’t know why you are paying so much…do you not contribute to a 401K or 403b?

            • Michael LaBossiere said, on February 21, 2012 at 5:31 pm

              It is my lack of deductions. I get the standard deduction, but my mortgage deduction is very low (Mitt could buy my house, its material contents and my truck with 2 days income) and I have no other legitimate deductions (no kids, etc.) that would add up to enough. Most folks probably have kids and other things that they claim.

              I do have retirement, but the state changed things so it actually lowers my salary and does not seem to lower my taxes.

  9. FRE said, on February 18, 2012 at 3:23 am

    T.J.,

    I don’t know how U.S. tax rates compare in progression to the tax rates in other countries, but I do know that some other countries have tax rates of approximately 50% and above. Whether middle income tax rates are higher than in the U.S. I don’t know; I haven’t researched it. But if a tax rate is 50% on all income over X amount and untaxed on all income below X amount, that alone would make it progressive even if there is a flat rate. Again, I don’t know if that is the case, but probably it would not be difficult to find out.

    One must also consider the benefits provided from the taxes to understand the full picture. In some prosperous countries, tertiary education is fully funded through taxes. Also, pensions and medical care are often funded through taxes. Public transportation is generally significantly subsidized which also reduces living expenses. So, if middle income people in those countries are taxed higher than in the U.S., living expenses are lower because of the benefits received through those taxes whereas for higher income people, the benefits are a lower percentage of their income. That also has a progressive effect even though it would not show up in the tax calculations. On the other hand, energy generally costs more and that would perhaps have a regressive effect.

    Things are often more complicated than they seem. I don’t have adequate information to do a thorough evaluation.

  10. magus71 said, on February 19, 2012 at 9:16 am

    It’s all moot, really. As the Congressional Budget Office declared, the current rates of spending are unlikely to recede, and by 2027, the wheels will start flying off the gravy train. It’s not a matter of ideology, it’s a matter of math.

    As for anon’s contention that Republicans want to cut everything but defense spending, remember that every country in Europe experiencing severe debt crisis have little military to speak of. Entitlement spending is increasing because the ratio of workers to entitled is shrinking. Our entitlement spending is not commensurate with historical averages in America, while defense spending still is.

    • Michael LaBossiere said, on February 20, 2012 at 2:16 pm

      Unfortunately, a meaningful portion of the gravy cars pulled by the gravy train go to the wealthy and influential. So, I predict that we will not see much of a decline in spending, no matter what happens in 2012. Another big chunk goes to programs for seniors and the Republicans probably still have enough sense not to mess with them. Seniors vote and they don’t want the government getting its paws on their checks.


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