Tax Question

[steve]

Someone I know said, "I just think it's immoral that 4% of the households in America are paying 60% of the taxes collected."

I think this was covered a while back, but can anyone tell me if this is true? It just doesn't seem quite right.

[wumpus]

Paging Jason McCullough!

[steve]

Paging Jason McCullough!
Yeah, I was going to e-mail him since this was already covered here, but his profile didn't have one.

[Tyjenks]

I am not sure anyone would even want to hazard a guess, knowing that Jason is on his way. :)

[TimElhajj]

Someone I know said, "I just think it's immoral that 4% of the households in America are paying 60% of the taxes collected."

If it is true, lets just hope those 4% don't get pissed, take their ball, and go home.

[DavidCPA]

Someone I know said, "I just think it's immoral that 4% of the households in America are paying 60% of the taxes collected."

I think this was covered a while back, but can anyone tell me if this is true? It just doesn't seem quite right.

If they are talking about individual income taxes, they may be correct. Go here to see some interesting stats on the 1999 and 2000 income tax years:

http://www.irs.gov/pub/irs-soi/00indtr.pdf

Go to page 6 and you can see the number of tax returns and tax collections classifed by level of adjusted gross income. From this page you can see that filers with over $1,000,000 of AGI paid 23% of total individual income tax payments in 2000 even though they made up only 1.2% of the returns filed. You can use this page to semi-verify that person's statement. You can also find some useful tables on page 28 and beyond that adds more AGI classifications.

-DavidCPA

editted for additional table reference

[Jason McCullough]

Hah. I'm the go-to guy!

This is often mentioned with a lot of smoke-and-mirrors hand-waving by a.....special kind of conservative (http://www.rushlimbaugh.com/home/menu/top_50__of_wage_earners_pay_96_09__of_income_taxes .guest.html). It's usually part of a hysterical argument that the poor are basically using the federal government to hold up the rich for ransom. Since there's more poor people than rich, they'll just democratically steal all the rich people's money! That's why the top half of wage earners pay 96% of the taxes!

Whenever you see a conservative talk about income distribution, you should triple-check their sources. For example, why isn't the amount of *income* earned by the top 50%, 10%, and 5% of earners listed on that page? Why aren't sales and payroll taxes included?

Basically, the top half of earners pay that much because they take in about the same share of national income. The third table here (http://www.taxpolicycenter.org/taxfacts/overview/positiveagi.cfm) shows that the top 50% of earners collect 87% of gross income, while paying 96% of the income taxes. For the top 1%, it's 20% of income, 37% of federal income taxes. The effective federal tax rates for the top 1% are higher, yes, but they're carefully avoiding that particular detail; after all, there's not many people horridly upset that the bottom half, people with an average income of 0-30k, pay 1/4 the federal rate the top 1% of earners (100k+) do.

Basically, the poor don't pay much in the way of federal income taxes, but they make so little anyway that it doesn't distort the effective income tax rates paid by the middle class all that much. An incredibly lower rate for the poor raises the top half's rate by the equivalent of 10 cents on the dollar.

That's for just federal income taxes, though. Although I can't for the life of me find exact numbers, the FICA and sales tax rates on the rich are effectively zero (social security taxes only apply to the first $300k of income or so, and the rich don't spend much of their money on taxable consumption), while for lower middle class and poor payroll taxes are usually much larger than their federal tax bill. As you can see here (http://www.taxpolicycenter.org/taxfacts/overview/pay_inc.cfm), 46% of those earning under $30,000 a year pay more in payroll than income taxes; the number hits 99% below 10,000. Remember, that's a 7% or so off the top of the paycheck for the poor on all their income, but some guy making a million only pays an effective SS rate of 2% or so.

Sales taxes are extremely regressive too, as you can see in this incidence analysis for Texas (http://www.window.state.tx.us/taxinfo/incidence/table1_49.html).

The incidence of tobacco and alcohol taxes is interesting, but I'm unsure if they should really be included in progressitivity analysis; that gets into an extreme of the "are we taxing behavior or people" debate. If you do include it, the poor pay way, way higher proportions of their income on these than the rich.

In summary: when it comes to income and taxation distribution, conservatives lie. A lot. Especially when they talk about how a flat federal income tax or national sales tax "would be fair"; unless they're planning on revamping all the state & local tax systems too (hah, as if), such a system would be *extremely* regressive as a whole.

Edit: Steve, you owe me a beer for typing this up. :D

[Jason McCullough]

This thread really went down the memory hole.

[TimElhajj]

This thread really went down the memory hole.

Uh, is that like when food goes down the wrong pipe and you choke?

[Aszurom]

So, perhaps I'm deluded but it seems to me that we (the po folks) are paying about 28% out in income taxes and not having too many deductions. However, the wealthy seem to be able to construct tax shelters and dummy corporations to manipulate their money so that it's "laundered" out to them virtually tax free for the most part. I know that last bit because that's what my best friend's grandparents do. They're not making money by earning it, but rather making money by manipulating money - piling it different ways at different times and watching the interest compound tax free.

They tried to explain it, but I'm not an accountant - so they lost me.

I'm thinking what would be fair is that if I'm paying 28% out anyway - and then another 7% in sales tax when I spend it, plus an additonal 60% in sales tax when I buy gas, smokes, or anthing else with a big penalty tax on it - that I'm really being taxed to the tune of about 35% at minimum. Now, if I could just pay a 30% sales tax when I spend my money - OR - the government took a 15% cut out of my paycheck and left the rest alone, I'd feel that was more fair.

Let's say 15% flat taxation on income. All income, be it interest or whatever. Now, I'm paying about half the tax that I normally would but I'm not getting ANY write-offs. That's ok, because I didn't have any to begin with. However, every time Bill Gates cashes HIS paycheck, he pays out 15% of that too... rather than the sheltered up and deductified sum that I'm sure he's paying now. If my buddy's grandparents can get away with paying about 7% income tax after they launder their shit, I'm sure that the *truly* wealthy can afford to wring it a lot tighter than that.

Then again, maybe I'm wrong and the wealthy really do pay most of the taxes - but as a po folk, I don't feel it that way.

[Tim]

You should be getting a ton of deductions, Aszurom. The exemptions and standard deductions are huge for us po folk. Plus the lower tax rates (I think it's 10% for the first $6000 and 15% for the next $20000 or so). So your net tax rate is probably already below a 'flat' 15%. Compared to my gross income, mine has been pretty near 10%, even in recent years when I had a little money (after pretty vanilla deductions) at the 31% rate.

That $26k at 15% or less has a huge impact for the lesser people like us, but it won't make as much of a difference for someone with a few hundred thousand dollars in income.

The 'standard deduction' is a pretty sweet deal, especially considering it requires no effort or bookkeeping. I've itemized since having a mortgage that by itself slightly exceeds my standard deduction, but I'm not doing any fancy stuff - I itemize that, state taxes, some donations, and I think that's it. My gross income is reduced by 401k contributions and 125 plan withholdings for medical expenses. The end result has been a net tax rate of no higher than 12% as I recall.

[Aszurom]

[damn double post]

[Aszurom]

Ok, figure this out then...

I made 38,750 last year. How much tax do I owe? What percent of my income is that? My tax forms say that I take 28% and multiply it times total earned, and lick a stamp. Am I missing something other than the standard deduction here?

[Jason McCullough]

Minus the standard deduction, minus student interest loans, and you actually don't pay 28% on the full amount. They just tell you to look up how much you owe based on your AGI, right?

[Anonymous]

Am I missing something other than the standard deduction here?

Don't forget the millions you're going to plow back into the economy once The Man stops taxing your dividends.

[Tim]

There is a standard deduction and also a significant 'exemption' for you and any dependents. And as Jason mentioned, no one, except those entirely in the 10% bracket, simply multiplies adjusted income by a tax rate to figure tax owed. It's not retroactive once you reach 28% that all your dollars are taxed at that rate.

Some states are not like that. Colorado has only one tax rate and blessedly few deductions & exemptions. The form is basically "Take the number from line X of your federal tax form. Multiply by 4.x % (I forget what it is now). Pay by April 15." I've actually filed my state return by touchtone phone the last couple of years. Despite having an itemized federal return with schedule C for self employment income, my state taxes are about as easy as calling moviephone to find out where The Royal Tenenbaums is showing.

According to the web return system at www.turbotax.com, with a gross income of 38,750 and no other adjustments whatsoever (possibly pretax health insurance payments), you would owe $4736 in federal taxes for the year. That's a little over 12%. 28% would be almost $11,000.