Do I pay too much in income tax?

Great Debates
1

Do I need a tax cut? Convince me:

I am rounding, of course. You don’t have to know exactly what we made last year.

Gross adjusted income = 45,000. This is without about 3,000 of pre tax stuff such as 401K and medical insurance.

Married, filing jointly, no dependents, so exemptions + standard deductions = 12,950.

45,000 - 12,950 = 32,050

Still only in the 15% bracket so tax = 32,050 * 0.15 = 4,807.50

Now our net income was about 48,000 before pre-tax stuff, so the real percentage of our income paid was:

4,807.50 / 48,000 = 10.02%.

Now all things being equal, if GW’s tax plan goes through (15% bracket would be 10%), I would have paid 3,205.

4,807 - 3,205 = 1,602. Eerily close to the “savings” amount touted around. We must be that typical working family I’ve been hearing so much about. This would make my effective income tax rate:

3,205 / 48,000 = 6.68%

Now next year, we will be able to itemize. We bought a house in September and didn’t pay enough interest to itemize this year. Next year will be a different story and the amount of income tax I pay will be less. Much less.

Now, I’m talking about straight income tax here, not payroll taxes (You can debate that elsewhere). Just income taxes. As a 2 income family with no children, not itemizing anything, married filing jointly, do I pay too much in income taxes? Am I middle class? 10% seems like a reasonable effective rate. So does 6.7%.

Don’t get me wrong. I could use that $1,602.00, but tax cuts aren’t (or shouldn’t be) about what’s good for me but about what’s good for the country. Is it good for the country to give me and everybody who makes more than me at least 1,600 in tax breaks? Remember that if the only thing in that tax plan that passes is the lowering of the bottom rate to 10% then me and everybody who makes more than me gets that same $1,600.00 tax break.

Convince me that I pay too much income tax.

2

As I perceive it, that’s actually what the fundamental debate is about, LateComer. I’d agree with you that that’s what tax cuts should be about. That puts us on the liberal/communitarian side of the debate.

However, economic conservatives, especially libertarians, would argue that either (a) letting each individual have full control over (as close as possible to) every penny they make is inherently what’s best for the country, or (b) it really doesn’t matter what’s best for the country; the country has no moral right to take a penny more away from its citizens than it needs for the most minimal functions of government (generally limited to military, police, and courts), and that principle should be adhered to, regardless of the effects (which they believe would be strongly beneficial in the long run).

Nobody’s won this underlying debate yet, needless to say. :slight_smile:

3

I think you might owe less than you think. When people talk about a tax bracket,what they’re really talking about is the marginal rate. You do not pay 15% on all 45k you earned. Rather, you only pay 15% on the last X dollars you earn that bump you into the 15% tax bracket. In other words, on the first 25k that you earn, you only pay 10% (These are not the actual numbers). So, when someone says they’re in the 39% tax bracket, what they’re really telling you is that they earn (under the current scheme) more than 240k per year. Every dollar over 240k is taxed at 39%. Everything from (I think) 130k to 240k is taxed at something like 36%. Sometime in the last couple of weeks, CNN had a link showing the current tax rates with income brackets, but I don’t have the link.

FWIW, I think the projected surplus should be used to create a true Social Security trust fund (dare I say, “placed in a lockbox?”) and to create a prescription drug plan for seniors, but aside from that, they’ve overcharged me and everyone else the cost of running our government (note: I am not a libertarian and do not support a minimalist government; rather, I think there are very few politicians who won’t spend our money as fast as they can get it, regardless of the usefulness of or need for whatever program or project it is they’re spending the money on). On the other hand, I started a new job last year and even if Bush’s plan gets through, my marginal rate is going up…

4

KSO:

Your point is well taken. Many people seem to have little to know grasp for what a marginal tax system means. However, the 15% rate is the lowest tax rate at the moment. This also means that a drop in the lower brackets, is a tax cut for poor, middle and rich. I was just making the point that though the tax rate is 15%, once you subtract exemptions and deductions, the real rate is much lower than 15%. If I was a single person making as much as my wife and I do, I’d be paying a lot more (so much for the marriage “penalty”).

It just seems that I don’t pay that much in income taxes.

Also, I think I misunderstood the Bush tax plan. I’ll have to look into this. He doesn’t simply drop the bottom bracket to 10%, but also lowers the top of that bracket from about 28,000 to about 12,000. I have to look at the numbers again.

5

Well nowhere in your post do you mention what the government is doing in lieu of collecting the extra revenue. The bottom line of a tax cut is that in increases the amount of borrowing (or decreases the amount of debt you can pay off). Now this is actually a good deal, because a tax cut is a lot like the government giving you a low-interest loan.

Think about it, in this scenario the governmant essentially borrows $1600 at it’s very attractive federal rate and gives you the money. Or the governemnt could tax you the $1600 and then you have to borrow the money (i.e. your home loan, credit cards, student loans) at a rate that is almost certainly not as goos as the governement can get.

6

While it’s true that the government borrows at a better rate than you or I, I think part of LateComer’s point is that he has, on the whole, more than enough to live on already, and has a choice of whether to borrow or not.

Thanks to heavy borrowing in the past, the Federal government has no choice of whether to borrow, at present: the national debt is still over $5 trillion, and the annual net interest paid by the Feds will amount to $200B out of a $1800B budget in 2001. In other words, of every tax dollar we pay, 11¢ accomplishes no useful work, but instead goes to pay interest on the borrowing of the past.

In my not-so-humble opinion, that’s freakin’ insane. But it’s where we’ve gotten ourselves, through long years of borrowing.

And now, we finally have the opportunity to make some serious inroads on that debt - and with it, on the annual interest bill.

I say let’s do it while we have the chance. And when we’re done, then let’s consider appropriate tax cuts.

7

RT, while I personally agree with your point, I’d like to remind you that this perspective stands no chance whatsoever of carrying weight.

The national debt is an obligation that is pushed off to FUTURE government. Like the social security crisis, current politicians have deferred the problem until they personally are out of office. There is an incredible short-sightedness in, “Oh, look, we finally got a little extra money, quick let’s spend it instead of trying to reduce our debt.” It’s the same mindset that gets so many people into so much financial deep water with credit card debts etc.

It would be nice to find a politician who could look beyond the practical aspects of the next election. Whether you stand on the “do what’s good for the country” side or on the “do what’s good for the individuals” side, as per RT’s earlier comment, the long-term focus should still be on debt reduction first.

8

Right…the new 10% level would apply over only part of the range of the current 15% level. Looking at the numbers on the Citizens for Tax Justice web page, it looks like your cut would be something more like $900.