Monday, November 20, 2006

Training update and Sales tax and the math

Training update:

I’m fighting a bit of an illness.  There is no training being done except the occasional coughing fit which is great to tone the abs.

This is even less fun than running.

 

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And now for the final bit on taxes…

 

First off, the math says that a flat tax raises taxes on low and middle incomes and lowers taxes on the higher incomes.  There’s no disputing the math.  Additionally backers of a flat tax tacitly admit that it isn’t exactly fair by offering rebates to lower income groups functionally making it a graduated tax where a disproportionate burden falls on the middle rather than the top.

 

After reading the article from “the only guy who has it right” 2 quick things come to mind.  First he’s a politician.  He’s the guy who was formerly from Oklahoma and was moved—by his party—to Illinois to run for an open seat in the Senate because a guy from Oklahoma who just moved to Illinois is far better equipped to represent the people of Illinois than someone who, oh, I don’t know, actually lived in the state for any significant time at all.  He is one of the symptoms of a broken system that we are enjoying in these fine United States

 

Second he’s presenting what appears at first glance to be an idea to help me.  Never mind the fact that the premise behind the idea is based in unfounded paranoia, is entirely unsustainable, and impossible to implement.

 

My primary rule of politics is to always—ALWAYS—be wary of politicians who want to help me.  Invariably what happens is their proposals tend to help themselves—such as the flat tax, or in this case, the national sales tax.

 

There is no dispute that a wide swath of the American population believes that the government’s money is the government’s money and their money is their money, while in fact the government’s money is THEIR money and their money is their money.  The vast majority of people get their refund check at in April and think they’ve gotten free money rather than the reality that they’ve given their oh-so-responsible government an interest free loan for the last 12 months.

 

But the assertion that thanks to the withholding from your paycheck the government is letting you have the net portion of the paycheck is plain wrong.  You control your withholding.  The simple fact that a withholding system is necessary should tell us that income taxes are too high.  The only reason to have it is the same reason you pay your property taxes into escrow each month—the vast majority of people are simply not responsible enough to put away enough money to pay their income taxes at the end of each year.  That’s all.  Nothing more.  If the choice is to have a withholding or subsidize the slack minded idjits who can’t manage to leave what is owed to Caesar well enough alone with a higher tax rate on my own income, I’d rather have the withholding.  If you don’t like it, adjust your W2, but don’t complain when the tax man comes calling.

 

Secondly, extending the 501c3 status to churches—all non-profits, for that matter—is not some “government control” scam and you and I both know that revoking the tax-free status will not only not prevent real believers from gathering but will provoke a nationwide revolt.  To play off the fear and paranoia of the general populace is bad enough.  But to suggest that by extending tax exempt status to non-profit organizations is equivalent to exerting control over the free conscience and expression in these institutions is detestable.

 

Third, he completely misrepresents the theory behind a graduated income tax.  Simply put, the graduate income tax taxes lower incomes less than higher incomes.  It’s not because some people are too rich so their money must be taken away.  Certainly some socialist thinking people subscribe to this, but the truth is that simple math and logic demonstrates that a graduated income tax is more fair than any other system.

 

Why? 

 

The first money through the door is spent on necessities.  The richest of the rich and the poorest of the poor spend their first dollars on the same thing—housing, food, utilities, transportation, usually in that order.  When money is left over there are luxuries purchased.  The last dollar through the door pays for the fancy new rocket ship to the moon.  Therefore it is patently unfair to tax the money spent on necessities at the same rate as the income that can be used for frivolity such as $20,000 bed sheets.  You should never, ever have to forgo food in order to pay the tax bill, but I don’t consider the decision to buy a mere Lexus rather than an Aston Martin a sacrifice.  And those who suggest a flat tax agree by proposing discounts for the lowest of income brackets.  They suggest no premium for upper brackets mainly because, I suppose, they are members of that bracket.  I’d wager there are very, very few people in the upper income brackets who have fallen out of those brackets because of their tax bill and an equally miniscule number who would voluntarily give up their riches for the life of a single mother of 2 in order to pay less taxes.

 

But Mr. Keyes doesn’t propose a flat tax.  He proposes a sales tax (that didn’t exist before the income tax was instituted in 1906 yet claims to want to return to the system our founders intended, even if it slipped their mind to institute it).  A similar proposal can be found at www.fairtax.org.  These people calculate a 24% sales tax on everything purchased, but the withholding system will be ended entirely.

 

Time for math:  The average income is $34,000.  An assumed 15% withholding between medicare, fed tax, and SS removes $4971.94 from the annual tab.  Assuming you save 10% of your remaining income you’ll spend $26,125.25 for the year and have $2902.81 in the bank.  Federal tax withholdings is about $3000 of that $5000 withheld, so lets just assume that all of that is the tax bill and you either get no refund, or you get some small pittance back or pay some small pittance in April to make the math cleaner.

 

Under the 24% sales tax you’re going to keep your withholdings.  Lets also assume you’re completely different from the average person and your spending level doesn’t increase with all those extra dollars and we’ll keep the spending level at $26,125.25.  Your total savings is $4971.94 (saved withholdings) plus $2,902.81 for a total of $7874.75 in the bank at the end of the year.  Except you have to add 24% to the spending tab which amounts to $6270.06 which actually reduces what’s in the savings account to $1604.68.  Everywhere I go $1604.68 is less than $2902.81 AND $6270.06 is larger than $4971.94.  The math says that a sales tax is a tax increase for the average guy.  Maybe prices will go down—I doubt it.  Maybe spending will go up—very likely thanks to the added dollars on the paycheck, even more so if prices drop a fraction.

 

Additionally, the argument that you can control how much tax you pay with a sales tax is bogus.  Only those with plenty can control the amount of tax they pay.  As noted before the first money through the door is spent on necessities.  The last money through the door pays for the new rocket ship and $20,000 bed sheets.  Someone making only 10k cannot decide whether or not to pay federal taxes when 100% of their money goes out the door.  In fact, try telling your children that you’re not having dinner tonight because you’ve paid enough to the federal government today.  Or go to the office naked because the feds have simply gotten enough this year.

 

It just doesn’t work that way.

 

And for what it’s worth the fairtax people agree by offering the “prebate” to lower income earners.  This offer not only admits that the “fair tax” isn’t fair at all (at least not to the lowest income brackets), but it establishes a graduated tax based on income which is the very system they’re trying to abolish.

 

For my own part, I hate the income tax with a fiery burning passion.  But unless the income tax is going to be abolished all together, the revenue replaced by other means, and a more regressive tax is not implemented in the void, then the graduated income tax is the fairest system out there.  I don’t like it.  I’d love to see it gone.  But I’d hate to have a flat tax or sales tax replace the graduated income tax even more.

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