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October 20, 2008

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In fact, Jefferson, Madison, and Franklin certainly did envision representation without payment of income taxes, because the United States didn't have income tax in the early days.

Hard to believe, but Strassel is even more obnoxious than May.

Where do these people come from?

Is that 40% number even right? 40% of adults don't pay any federal income tax?

But yeah, what hilzoy said.

Mind you, part of the reason people may pay no Federal taxes is because they're holding down a low-wage job at Walmart instead of something in construction or manufacturing. What bothers me most is not that many people and families don't have a Federal tax bill but that many earn so little that any such bill poses a huge problem for them.

And why are the earnings of money managers getting taxed at the lower, capital gains rates?

I wonder if they are including the payroll tax as a federal income tax.

Remember that chapter in "Rush Limbaugh's a Big Fat Idiot" where Franken takes Limbaugh apart for saying Reagan lowered income taxes when he ignored payroll taxes? It seems a lot like that.

Are you actually arguing that its OK to reassign the earnings that some citizens pay in federal income tax to other folk that pay no federal income tax because the people that do not pay any federal income tax may pay some other sort of tax to some other level of government?

Hilzoy, are you trying to avoid any reference to FICA? Does it not count as a tax?

Payroll taxes are income taxes. They are levied on income. If you're a taxpayer, both come out of the same pocket. If you're the government, both go into the same pot.

--TP

You know the worst offenders? Children. They suck up massive amounts of government services, pay no taxes. Worse than that, we encourage people to shelter and provide for these useless freeloaders by giving them tax deductions, even further subsidizing these parasites.

Don't forget the payroll tax for social security. Lower income workers pay a higher percentage of their earnings in this tax then the millionaires in the republican party.

TonyP: no, I thought it was in my list of exotic taxes. But on closer examination, it's not. My mistake -- I started off the top of my head, and then had the clever idea of finding taxes I'd never heard of online, and I suspect that FICA got lost between the two.

I assumed that by 'income tax', they meant the Federal Income Tax, not FICA, even though it's levied on income. I was being charitable. ;)

On NPR this afternoon, on one of the call-in shows (Talk Of The Nation, I guess), they were discussing the candidates' tax plans and this lady calls in to say that she's against Obama's plan because it's unfair to people like her: she's recently out of Veterinary school, doing some fancy form of veterinary medicine, earning a salary of more than $250K and paying enormous student loan bills (and, to be clear, Good for her, I say, quite sincerely). Listening to her, I was convinced that this woman, who has advanced degrees and listens to NPR, was making judgements about tax plans while understanding neither the concept of Taxable Income nor the concept of Marginal Tax Brackets. The level of ignorance out there is stunning, and when you add to that the misinformation from these ninnies at NRO, who by virtue of their position as professional pundits have an obligation to be better informed, and are thus either willfully misrepresenting or just monumentally dumb ... it's not good. It's like those studies a few years back where the more you listened to Fox News the less you were likely to know.

This is all amusingly ironic given the political history of the federal income tax . . .

DAVIDA

It's called the Earned Income Tax Credit and has been around since 1975 (Ford). It was expanded by Ronald Regan.

And your problem with it is?

Beyond that, taxes I pay go to pave roads in your city. And we all get to chip in to send a couple grand to everybody in Alaska and Sarah Palin says "Thanks, sucker."

But God forbid that we give a working poor family a break on their Social Security tax.

Children, schmildren.

It's soldiers who suck up my tax dollars, not only through their exorbitant gummint work for foreigners but then they come home and expect me to foot their medical bills and pay them food stamps so they can feed their schmildren.

Some of them have parasites, having watered at the Halliburton bar and grill. By God, they are parasites WITH parasites.

And yet, we grant them Milton Friedman's negative income tax.

He worked for the gummint .... twice, he liked it so much.

Welfare? I thought that was Alaska?

No state income or sales tax. State takes profits off of private business and hands it out to residents - $3200 per resident, regardless of income, need, etc. And if you are a Republican governor now running for VP, you increase the amount, not decrease, reduce the skim off of business, etc.

And Obama is the socialist?

All this talk of the poor! Might I offer http://www.gutenberg.org/files/1080/1080-h/1080-h.htm>A Modest Suggestion? I salivate at the thought!

(Grammar folks- Is the work in question long enough to get italicized, or should it just be put in quotes? I'd guess it would be a 2-3 page pamphlet.)

PTS- If you can force yourself to do it, reading what Rush 'wrote' on taxes is as funny as Franken's ripping him a new one. But that's an exercise best left to the advanced (not to mention highly patient) student. ^.^

while understanding neither the concept of Taxable Income nor the concept of Marginal Tax Brackets.

The misconception that tax brackets are not marginal is extraordinarily common. I suspect it's the actual meat of the "Joe the Plumber" story: many Americans have a vague fear of entering a higher tax bracket, because they believe that the higher tax rate will be levied on all their income, rather than on taxable income over the bracket threshold, and ruin them.

They fear this even though they apparently manage to file an income tax return every year, and that the tax code does not do this is apparent from a study of the 1040. I suppose that if you use TurboTax, like I do, it's hidden from you to some extent.

Sometimes I hear people complain that the bracket structure completely eliminates the incentive to earn money, and for a long time I was baffled by this claim, because, after all, the top marginal rate these days is a lot lower than it was in the 1950s (when America's economy was fatally hobbled by the Communism of the leftist radical Dwight Eisenhower). But if you were to imagine that tax rates aren't marginal but apply to all income, that of course would equate to a marginal rate many times larger than 100% in a certain interval, and suddenly the fear makes sense.

This is not to say that perverse incentives of this sort don't exist anywhere in the world of taxes and government services. But tax brackets, at least, don't work that way.

Are you actually arguing that its OK to reassign the earnings that some citizens pay in federal income tax to other folk that pay no federal income tax because the people that do not pay any federal income tax may pay some other sort of tax to some other level of government?

It's called the Earned Income Tax Credit

And it can net you as much as a whopping $4716.00 a year if you have more than one kid. That's almost $400.00 a month!

The average EITC distribution is about $1800.00 a year.

But I, personally, wouldn't argue that it's OK to transfer funds from one taxpayer to another because the recipient pays another form of tax. I'd argue that it's OK even if the recipient pays no taxes whatsoever, of any kind.

That's just my point of view, hilzoy may wish to speak for herself.

And, of course, virtually nobody pays no taxes at all, so it's kind of academic.

Thanks -

You know, the one thign that irritates me the most about John McCain's assertion that 40% of people don't pay taxes is that it seems irrelevant to the argument. Look at the wording: "95% of working families" and "40% of Americans". I believe, to qualify as "working" in America, you have to be eligible for unemployment, which means you have to work at a fulltime job. I refuse to believe that 40% of all people working full time make less than $11,000 (or whatever the cutoff for the bottom 0% bracket is these days). In fact. if you work full time in America, by definition you do not fall into that tax bracket (7.25*40*52 = 15,080). Just what numbers are McCain using for these numbers? Is he implying that children are included? Is he also implying that children will somehow be getting a government check? I mean, tax credits don't even work that way. So this whole IRS = Welfare state doesn't pass the smell test from the get go, and is clearly not what Obama's proposing in the first place.

the top marginal rate these days is a lot lower than it was in the 1950s (when America's economy was fatally hobbled by the Communism of the leftist radical Dwight Eisenhower)

The top marginal rate during Eisenhower's presidency was over 90%. That rate kicked in at $400K.

I can't find real income figures for the 50's but in general I don't think it is remembered as a time of deprivation. A lot of folks got rich.

Obama's proposal raises the top rate from 36% to 39% for incomes above $250K. That is an increase of 3% -- three cents on every dollar -- for earned income above a quarter of a million dollars.

Just a point of comparison.

Thanks -

these ninnies at NRO, who by virtue of their position as professional pundits have an obligation to be better informed

Oh, I think they are perfectly informed. Swindlers need to know the truth, to pull off a successful scam.

And their scam does have a certain nefarious brilliance: if you and everybody you know has taxes withheld from your paychecks, those 40% must be people you don't know. Others. Not Real Americans (TM).

People might catch on to the scam eventually, though, for it's roughly of the same form as George Carlin's old joke:

"Studies show that 1 in 4 Americans is homosexual. So, get 3 of your friends together, and if they're not, you're it."
My own studies show that 3 in 5 Americans get that joke.

--TP

I can't find real income figures for the 50's but in general I don't think it is remembered as a time of deprivation. A lot of folks got rich.

My apologies: I was being sarcastic.

Speaking non-sarcastically, you're right: there's something that just doesn't compute about claiming that high top marginal tax rates will be a fatal drag on the economy, when the period of highest top marginal rates is remembered to this day as a halcyon era of prosperity.

People sometimes complain that the Republicans want to take us back to the 1950s. They don't. The 1950s had a lot of problems, but it was also an era when there was an extraordinarily progressive tax structure by today's standards--more progressive than I think I might even support.

According to this WaPo fact check of McCain's "welfare" complaint, Obama's proposed credits people paying no federal income tax are in fact intended as an offset of FICA. So the relevant level of government is the same.

russell: yes, I'd be fine with that too. (I mean, there are limits, but I have nothing against it in principle.) It was just this persistent identification of "people who pay no federal income taxes" with "people who pay no taxes" that bugged me.

Obama's proposal raises the top rate from 36% to 39% for incomes above $250K. That is an increase of 3% -- three cents on every dollar -- for earned income above a quarter of a million dollars.

Not exactly. The top rate now is 35% on taxable income over $349K, with a 33% rate on taxable income between $160K and $349K. Taxable income is not, of course, "what you make". For most people, it's quite a bit less.

Obama proposes to "restore the two top income tax brackets to their 1990s levels of 36% and 39.6%". Not change the threshholds, please note, just the rates.

The $250K figure comes from adjustments to the "phase-out" formulas for deductions and exemptions. Those deductions and exemptions are the difference between "what you make" and your "taxable income"; they phase out as your income goes up.

Obama's plan refers to couples "making less than $250K", which of course means couples whose taxable income is less than that. Such couples are in the 33% bracket now, and would not get into the 39.6% bracket without pay raises so substantial they'd pee their pants with the joy of them.

It's a hell of a tax system we've got going here, ain't it?


--TP

I think it's probably a good idea, but we should note in the interest of accuracy exactly what the Obama plan amounts to: a reduction in FICA taxes for most people, combined with a transfer from the general fund to SS/Medicare and a rise in FICA taxes for the rich to cover the shortfall.

Which means that it reduces somewhat the degree to which the Social Security and Medicare programs are independently funded and do not constitute a significant transfer from one income level to another. They're a generational transfer rather than a transfer between people ofdifferent income levels, mostly. Someone correct me if I am wrong in saying that that is the case right now. Obviously in the case of disability or bereavement someone might get a lot more out than was paid in.

Anyway, this changes it around a bit so that some (poor) people will get a bit more than they put in and some (rich) people will get a bit less. Not the end of the world, but it is a change.

Personally I'd say just throw it all in the general fund and be done with it, and simply count FICA taxes as income taxes. which would expose the real tax structure in this country. Which is one where most of the ordinary working people pay a very large share of the taxes.

But while some of the rich are going to cry foul or say it's unfair, I'd say that what's really unfair is the way business (largely synonymous with the rich anyway) has squeezed workers by opposing increases in the minimum wage, offshoring jobs, preventing or punishing unionization, opposing full-employment policies, and generally not paying a fair share to labour in wages. Capital requires a return, that's fine; management should get paid, okay; R&D need to be funded, sure; but workers also need to get paid. The fierce opposition to wage increases even in line with productivity increases is what has put us in this situation. And of course the fact that executive income has skyrocketed during the same period adds insult to injury. Especially as it is becoming clear that the means by which that income was acquired seems often to have done great damage to the company itself and therefore to its workers' future.

Now, I'd rather that corporations reversed course and started paying more in wages than that we try to fix it with tax rebates. I'd also like a pony. In the meantime I'll take a $500 reduction in FICA costs.

Of course, the way McCain describes it isn't even remotely accurate, and in fact since 95% of people won't be paying any more taxes, it's a lie to say to a crowd (unless they're all ultra-rich) that they will be paying extra for transfer payments to other people. Because the undistorted version isn't nearly so scary: the richest 1.5% of the country will be paying a little more, and 95% of the rest of us will be paying a little less. Most people can see that as being no threat, and after the past 8 years, most of them are probably ready to soak the rich a little.

Apart from children* the greatest parasites are obviously women, especially traditional ones. Conservatives have preached since times immemorial that women should not work for money (at least not for money that ends up with them). Two squirrels with one stone: Women that earn money are against nature and those that do not are parasites.

*You remember the cries of foul when laws were introduced that cut hours for legal child labor to a mere 8 per day? How that would ruin the economy? Now we see the results.

We should cut medical research funding--that's taxpayer supported but the majority of sick people are poor, or can't afford treatment anyway. So, no more guinea pigs and health care trials, no more novel surgical procedures, no more research. Because g-d forbid we use taxpayer money to pay for stuff the whole of society needs. Hope there are enough rich people to pay out of pocket for experimental medical treatment that some of them may need inthe future.

aimai

"A majority of American would enjoy representation without taxation. This is probably not a form tyranny that Jefferson, Madison, Franklin et al. envisioned."

If only because it's not a form of tyranny.

Tony P. Hilzoy, are you trying to avoid any reference to FICA? Does it not count as a tax?

Payroll taxes are income taxes. They are levied on income. If you're a taxpayer, both come out of the same pocket. If you're the government, both go into the same pot.

hilzoy:I assumed that by 'income tax', they meant the Federal Income Tax, not FICA, even though it's levied on income. I was being charitable. ;)

Well, Subtitle A of the Internacl Revenue Code of 1986 (as amended) is labeled "Income Taxes." It covers sections 1 through 1564 of the Code, none of which includes the FICA tax.

Subtitle C is labeled "Employment Taxes and collection of Income Tax", which includes the taxes require by the Federal Insurance Contributions Act, or "FICA."

So, technically speaking, "Income Taxes" /= "FICA Taxes."

I hope the commenter above is right about couples "making" more than 250K, but the problem is that once you get to that point, pretty much all of the deductions phase out except the mortgage interest deduction, and guess what? At that point your mortgage deduction is effectively limited by the AMT.

Now, I make a good living and expect to pay my fair share, but I think everyone should pay some income tax, and not FICA which at least in theory is in exchange for some benefit down the road. I remember when my income was such that I paid no taxes, and I always thought I was getting away with something. As for all the taxes above, people who get the EITC sure as hell aren't paying gift taxes or estate taxes or anything on the list other than sales tax. When you pay income tax, you have to think seriously about what it is you are getting in return. For those who pay nothing, or worse, get money back, it's too easy to view themselves as free riders without a "stake" in society. It's like Obama's campaign. Those who gave $5 feel much more invested than those who wish him well but didn't give anything. Why not have at least a $5 minimum income tax?

At that point your mortgage deduction is effectively limited by the AMT.

The AMT only limits certain types of mortgage interest deductions, which does not include the deduction for interest on a mortgage taken out to purchase a home.

I said "effectively limited." I don't pretend to understand it, but the only deduction of any size I have is property taxes (on my home) and mortgage interest (on the loan to purchase my home). But AMT bites my ass every year to the tune of several thousand dollars. Calculating my tax the regular way winds up with one number; calculating AMT winds up with a bigger number, and I pay.

It's the state property taxes that's likely getting you (plus, if you have a state income tax that you pay and deduct on your federal return, that too).

I stand corrected. I feel better knowing that I'm subject to AMT because otherwise Uncle Sam's not getting his portion of the money I pay in state taxes. My head asplode.

Capital requires a return, that's fine; management should get paid, okay; R&D need to be funded, sure; but workers also need to get paid.

Right on.

Further, the value created by the workers is the motor that drives the rest of the gravy train.

Thanks -

I feel better knowing that I'm subject to AMT because otherwise Uncle Sam's not getting his portion of the money I pay in state taxes. My head asplode.

Not to mention that Uncle Sam also imposes an income tax on the portion of your wages that are withheld under FICA (and then imposes another income tax when you receive payments for social security).

McCain must mean they don't pay anything beyond what has already been withheld. The standard deduction is about $8700. According to the tax table someone who makes $8705 will pay a dollar in taxes. So I guess 40% of the country is making less than $8700.

Either that or he is just a moron.

I support the Obama tax credits, but couldn't we just stop collecting FICA altogether? FICA is an absolute disgrace. Not even the most virulent right-winger would ever propose such a regressive tax as a stand alone revenue measure.

The tax has two marginal rates: a marginal rate of 6.2% (employee) up to $102,000, and a marginal rate of 0% on incomes above $102,000. This is absurd. Some people propose a flat-tax, but how can anyone seriously defend a tax system where the marginal rate actually drops to zero percent for six-figure incomes. To add insult to injury, the tax only applies to earned income and totally excludes capital gains, dividends, interest, rents, etc.

The only reason a tax this regressive is allowed to survive is the persistent illusion that Social Security and Medicare are somehow not actually government programs, which have to be paid for with ordinary tax dollars. Therefore, people view FICA as some sort of government mandated insurance premium. Of course, if we admitted that these were actually just social welfare programs, then we'd have to ask why they aren't means tested. Why should someone making minimum wage have to pay to send a check to Warren Buffet each month?

The only reason a tax this regressive is allowed to survive is the persistent illusion that Social Security and Medicare are somehow not actually government programs, which have to be paid for with ordinary tax dollars.

It's worse than that. The GOP's master scam is based on simultaneously treating SS in particular as both a government benefit and a stand-alone retirement fund.

The SS Trust Fund runs a surplus based on collecting a regressive FICA tax. It lends the surplus to the Treasury. That makes it easier to reduce taxes at the top of the progressive income tax. In return, the Trust Fund gets Treasury bonds, just like any other lender would.

But then the GOP scammers turn around and say those bonds are worthless because, hey, we already spent the money. We would have to (gasp!) raise the income tax, when those bonds come due, to pay those "entitlement" benefits.

If the GOP tried the same scam with the Chinese central bank as they keep trying with the SS Trust Fund, they'd get their balls handed to them.

--TP

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