Liberals are always talking about how the wealthy need to pay their “fair share” of income taxes in this country. I consider myself to be a liberal, but this argument is a stretch, to say the least. The wealthy DO, in fact, pay their fair share. Those in the upper echelon of income earners pay a substantially larger chunk of income in taxes than the rest of us. As of 2010, the top 5% of wage earners in this country pay 40% of the income taxes collected in this country. The average multi-millionaire pays nearly $1.5 million in income taxes each year – more than 150 times the amount the average American pays. And, this is counting all of those sweet deductions that the wealthy get to take advantage of.
That being said, I still believe that the wealthiest among us should pay more in taxes because they can afford to. For me, it isn’t about the percentage of income that is a deciding factor – it is the actual available income, after taking into account real life expenses.
For an example, we’ll look at the 2010 federal income tax and compare a family of four making $60,000 a year and another family of four making $2,000,000 a year.
The middle class family, at $60,000 a year in joint income (Schedule Y-1), will be in the 15% bracket. They will pay a total of $8,165 in federal income taxes. Not an insurmountable amount, but that is only part of the overall financial burden. According to the Department of Housing & Urban Development (HUD), the average middle-class American family spends roughly 35% of pre-tax earnings on housing (rent or mortgage, insurance, utilities, etc). That means our middle class family will be spending $21,000 on housing costs for the year. That lowers their available income to $39,000 a year. Add to that the $8,165 in federal income taxes, their total available funds drop to $30,835. Of this amount, roughly 28% (according to the Department of Commerce) - will go to the “other” taxes, state, local, property taxes, sales taxes, etc. – that’s $8,634. Now, the middle class family has $22,201 left. Factor in food, car payments, 2 dependent children, trying to save for the children’s college education and for the parents’ retirement, and you’re looking at a pretty tight financial situation.
The wealthy family, at $2,000,000 a year in joint income (Schedule Y-1), will be in the 35% bracket. They will pay a total of $765,582 in federal income taxes. That is A LOT of money, but considering the total income, they are still sitting pretty with over $1.2 million dollars which makes the next part VERY disappointing. HUD estimates that the average total housing costs for people who make over $1,000,000 in this country hovers between 1-8% of pre-tax earnings, generally because folks with this much money can buy their homes outright. No mortgage payment = lower overall costs. We’ll slap this family with the 8% number and they’ll be paying $160,000 in housing expenses. They’re still over $1,000,000 in available funds. Also, the average in “other taxes” the Dept. of Commerce says those who make over $1,000,000 pay out of their remaining total: 5%. Our wealthy family has $1,074,418 after federal taxes and housing costs. Subtract 5% of that – which is $53,721 – and they are left with $1,020,697 for everything else.
Now, this is a very simplistic comparison, and doesn’t take into account the multitude of federal tax breaks and incentives both families are able to take advantage of. My point with this comparison is to explain how the current tax system is easier for the wealthy to handle than it is for the middle class.
There is a lot of discussion in Washington about reforming America’s tax code. Many have argued that, in exchange for the elimination of most tax incentives and loopholes, we would be able to lower the overall tax rate to 25% or less, only use 3 tiers, and still generate more revenue. I believe that could work, and make the system fairer overall.
I would institute a 3-tiered tax rate that started at the poverty level, plus 25% (as of 2010, that would be $13,952 for individuals or $27,195 for a family of four). Anyone at that level or lower would pay no federal income tax. From that level to $100,000 for individuals or $250,000 for a family, an income tax of 10% would be levied. From $100,001 for individuals or $250,001 for a family to $1,000,000 for individuals or $2,500,000 for a family, an income tax of 17.5% would be levied. And for all income over $1,000,001 for individuals or $2,500,001 for a family, an income tax of 25% would be levied.
No deductions would exist for the top bracket and the upper half of the middle bracket. The lowest bracket and the lower half of the middle bracket would be allowed to make some deductions, especially for big ticket items like college, mortgage interest, etc. Also, things like capital gains and estate inheritance would be rolled into general income – without any special tax. So, if Aunt Mildred dies and leaves you $10,000 or you cash out $300,000 in stock options – simply add that amount to your year’s earnings and whatever bracket you land in, that’s what you’ll pay. To me, this seems like a much more predictable and fair way to levy taxes than our current system.
Of course, there are a host of things to consider. And, this issue is so complex that it needs and fully deserves a long, thoughtful, and thorough debate in Congress and with the American public. Both sides have legitimate ideas about the tax code, and both sides should be granted the right for their ideas to be discussed and debated.
Taxes are a burden, but a necessary one. The more we can do to make the system fairer and more effective, the better off we will be as a nation.
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