Wednesday, April 15, 2009

Another Example of the Evil Bush Tax Cuts For The Rich

I still do a few tax returns on the side, and it interests me to see how the tax code affects different situations.

From an actual federal income tax return filed this year:

A family consisting of a husband, wife, and three children, with an income of $70,000. They own a home, so are able to deduct the interest from the mortgage. They also made sizable contributions to charity. Thanks to Bush's tax cuts, they can claim $3500 in exemptions for each person in the household, for a total of $17500.

After their exemptions and deductions, their tax liability was $2899. Since Bush doubled the child tax credit, they get to claim $1000 per child, which lowers that tax liability dollar for dollar. That means they have zero tax liability. And since the child tax credit is refundable, the family not only pays $0 in income tax, but gets $101 from the government.

Now, they had money withheld from their paycheck throughout the year, but they get all of that back too, making their tax return about $1400. It could have been much higher, but, knowing how their return was likely to turn out, I had them withhold the least possible amount from their checks during the year.

This return is similar to that of the "struggling mother earning minimum wage", and that of the family earning $45k, paying zero income tax and getting paid $2400 by the government. Before the Bush tax cuts, that family would have owed $950.


David said...

Neither the family making $70K nor the family making $45K should have been paid by the government. Whether or not they should have paid any taxes is a different question, but they definitely should not have been receiving more money back than they paid. I think that's one of the subtler problems in our tax code.

Cameron said...

Not to mention the single mom who likely gets paid anywhere from $3 to 5 thousand.

It's an interesting part of the tax code. I've read some literature which claims that these kinds of refundable tax credits are better than welfare programs. Sort of a give them cash instead of food stamps thing. They claim the cash is more effective.

Frankly, the key to the $70k and the $45k earners, besides the fact that they itemize and give higher than average to charities, is the three kids. They get the 1500 exemption per child, but the really big break comes from the tax credit. That's a dollar for dollar decrease in tax. And if you're tax is less than the credit then you get paid the difference.

If you make under the $36k-ish range, then you'll qualify for the earned income credit, which is also refundable and can get you paid thousands of dollars.

Anonymous said...

The problem with this logic is you make an argument that tax system should be used as a welfare system. Instead, tax systems can be used to promote good social behavior. In this case, the tax code was used to promote families. Families are a core part of our society. The breakdown of our families will lead to the breakdown of our society. There is nothing wrong with promoting families.