Tuesday, April 15, 2008

Tax Cuts for the Rich: 1999 vs 2007

Let's take a married household earning about $45,000, with three dependents, owns a home, and gives slightly more than average to charity (as Republicans are wont to do).

For tax year 2007 this household would pay $0 in federal income tax. In fact, not only would they pay $0, but they would get over $2400 from the federal government. This is not money being refunded to them - it's free money from the government.

Now, if this same household had filed using 1999's tax laws, they would have owed $950. That's a $3,300 swing in the wrong direction.

So, over the next year or so as the Bush tax cuts are debated, the phrases, "tax cuts for the rich" or "tax cuts for the wealthiest 1%" or any derivation thereof, are hereby banned.


Scott Hinrichs said...

There is actually a fair amount of support in Congress for keeping most of the tax cuts in place that would impact the family you feature. However, these social engineering policies actually negatively impact economic growth.

Conversely, the portions of the Bush tax cuts (capital gains & corporate taxes) that have caused growth are about to be scrapped. The $3300 benefit you mention will more than be erased by economic impact. Oh, the family won't pay it to the government directly, but it will pay.

In fact, part of the problem with expanding government is that the people in your featured family do not pay for it. In fact, they make money from government. Therefore, they are not incentivized to desire limited government. Nor do they apparently feel any guilt over robbing their neighbors.

Ashlee said...

I like keeping my money. I hate taxes. That's all I have to say about that.

Anonymous said...

That's funny, add one dependent and you basically described me in the first paragraph, but I had to pay taxes. What little refund I got was just that, a partial refund of what I had already paid in.

I made about $47,000 and I paid $1700 in taxes so I effectively made $45,300. If I had made $45,000 in your scenario I would have effectively made $47,400. So if I had made $2000 less I would have come out with $2100 more money in my pocket for the year.

I can vouch for the fact that this is true because last tax year I did make $45,000 and I got a huge return (everything I had paid in plus about $2400).

What's wrong with a system where I give money to people who made almost the same amount as I did so that they end up making more after the swap than I did before the swap?

(I'm only posting anonymously so that I can be so detailed about my tax situation.)

Cameron said...

Income taxes for the middle class were drastically cut via the Bush tax cuts. I had always known that income taxes for the poor not only disappeared, but actually became a source of income under the Bush tax cuts, but I hadn't thought about how high of earners fell into that "income" category until now. The Earned Income Credit and the Additional Child Tax Credit are the main culprits. Not only do they reduce taxes owed, but they can be paid out even if nothing has been paid in. So tax payers become tax earners.

And a large chunk of people fall into these income categories. Per capita income in Idaho is $33,274 and in Utah it's $32,249. That's a whole lotta credits being paid out.

Now, my scenario might not fit everyone that hits that income level. It is largely dependent upon a fairly substantial (by national standards) charitable contribution. I put it at slightly over 10% because of the LDS population in Utah that pays tithing and fast offerings. The national average is less than 10%. But there are other deductions that I didn't include in my scenario that could have been included. The tax system has so many variables it's hard to pin it down to "you'll pay x amount if you make z amount".

The point of the exercise was to note the difference in President Clinton's tax policy towards the poor and middle class vs President Bush's policy towards the same groups. The poor and middle class paid more taxes under Pres. Clinton than they do under Pres. Bush's "tax cuts for the rich", yet President Clinton is seen as the great savior of the poor. Perception just doesn't match reality.

This administration's tax cuts were drastic, and they just haven't gotten any pub during the 7 years they've been in place.

Instead, all we hear about are the tax cuts for the rich.

Ironically, since these tax cuts were enacted, the portion of the total tax collected that comes from "the richest 1%" has increased dramatically. It's the rich that are funding our government.

That's why I get so annoyed with these slogans. They're nonsensical.

Also of note is that family portrayed in the post not only gets a $2400 "refund", but they also stand to get a substantial sum in next month's rebate checks.

Anonymous said...

I guess it's all well and good that EVERYONE is paying less in taxes now. But Cameron, even though the rich are paying a higher portion of the total taxes, and they've had tax cuts... there's just much less being collected in taxes, then?

Because with the war and the massive expansion of the federal government structure under Bush, it seems to me that less in taxes might result in... huge deficits?

I mean, I'm no expert, and I don't have any statistics at hand, but it seems to me that cutting EVERYONE'S taxes and indebting our country into oblivion, just to be able to say that taxes are low... is stupid and irresponsible.

Cameron said...

Anon, I'm certainly glad that we've now gotten to the point where we can agree that "tax cuts for the richest 1%" is a blatant falsehood.

It's a wonderful starting off point to recognize "that EVERYONE is paying less in taxes now" and that the rich are paying far more than their fair share of the total tax.

Recognizing those two points allows us to now have a conversation about taxes without any inane "Bush hates poor people" comments.

It's also interesting to note that despite the fact that EVERYONE is paying less in taxes now, and that poor and middle class earners now get back money that they didn't even pay in the first place, the US government has the largest tax revenue its ever had.

Government has low taxes, yet brings in more than it ever has.

So you are correct that the problem lies not in the tax revenue side of the equation, but on the spending side.

Anon, I will gladly join you in your crusade to cut government spending.

Charles D said...

According to the IRS site, a family earning $45,000 would not be eligible for the Earned Income Tax Credit. While of course, one can make all kinds of assumptions about the mortgage deduction, I still find your calculations a bit dubious.

According to the Center for Budget and Policy Priorities,

"* In 2006, households in the bottom fifth of the income spectrum received tax cuts (averaging $20) that raised their after-tax incomes by an average of 0.3 percent.

* Households in the middle fifth of the income spectrum received tax cuts (averaging $740) that raised their after-tax incomes an average of 2.5 percent.

* But the top one percent of households received tax cuts in 2006 (averaging $44,200) that increased their after-tax income by an average of 5.4 percent.

* Households with incomes exceeding $1 million received an average tax cut of $118,000 in 2006, which represented an increase of 6.0 percent in their after-tax income. That is more than double the percentage increase received by the middle fifth of households.

Finally, some of the tax cuts enacted in 2001 are still being phased in, and the tax cuts still phasing in are heavily tilted to people at the top of the income scale. These include the elimination of the tax on the nation’s largest estates and two income-tax cuts that started to take effect on January 1, 2006 and will go almost exclusively to high-income households. As a result, the tax cuts ultimately will be even more skewed toward high-income households, and will increase income inequality to a still larger degree, than was the case in 2006."

Mark said...

Actually, they pay taxes. It's just that their deductions over compensate them for the taxes they paid.

As an independent contractor, I don't have taxes deducted from my paychecks. At the end of the year I have to pay the taxes on my earnings, but thanks to expenses and various other deductions, I get a refund, also.

It may appear that I don't pay taxes, but if I didn't, my refund would be thousands of dollars higher than it is. Everyone pays taxes. The rich pay more than the poor, and the Libs hate that.

Cameron said...


The family used as an example in this post is an actual family. The calculations you call dubious are actual calculations used on an actual tax return.

In 2007 this family had over $2000 given to them from the gov't. Using those same numbers with 1999's tax rules, this family would have owed money.

And it's not because of the Earned Income Credit either. The mortgage deduction was not excessive either. There are three main reasons for the difference. First, the personal exemptions amount increased. Second, the actual income tax rates were reduced substantially. Third, the child tax credit was doubled.

I'd be happy to send you a spreadsheet with my calculations, if you'd like.

As for the info from the Center for Budget and Policy Priorities, it's really quite simple.

Poor people pay little in income tax. Rich people pay a lot. So reducing income tax from $950 to $0 doesn't have a huge impact. Frankly, that's why all those refundable credits were implemented. But take a rich person paying a lot of income tax and reduce it, and it will have an impact.