Taxes

Here’s what Obama says he’ll do about taxes:

Provide Middle Class Americans Tax Relief

Obama and Biden will cut income taxes by $1,000 for working families to offset the payroll tax they pay.

• Provide a Tax Cut for Working Families: Obama and Biden will restore fairness to the tax code and provide 150 million workers the tax relief they need. Obama and Biden will create a new "Making Work Pay" tax credit of up to $500 per person, or $1,000 per working family. The "Making Work Pay" tax credit will completely eliminate income taxes for 10 million Americans.
• Eliminate Income Taxes for Seniors Making Less than $50,000: Barack Obama will eliminate all income taxation of seniors making less than $50,000 per year. This proposal will eliminate income taxes for 7 million seniors and provide these seniors with an average savings of $1,400 each year. Under the Obama-Biden plan, 27 million American seniors will also not need to file an income tax return.
• Simplify Tax Filings for Middle Class Americans: Obama and Biden will dramatically simplify tax filings so that millions of Americans will be able to do their taxes in less than five minutes. Obama and Biden will ensure that the IRS uses the information it already gets from banks and employers to give taxpayers the option of pre-filled tax forms to verify, sign and return. Experts estimate that the Obama-Biden proposal will save Americans up to 200 million total hours of work and aggravation and up to $2 billion in tax preparer fees.

McCain says the following:

·         Keep Tax Rates Low: Entrepreneurs are at the heart of American innovation, growth and prosperity. Entrepreneurs create the ultimate job security - a new, better opportunity if your current job goes away. Entrepreneurs should not be taxed into submission. John McCain will keep the top tax rate at 35 percent, maintain the 15 percent rates on dividends and capital gains, and phase-out the Alternative Minimum Tax. Small businesses are the heart of job growth; raising taxes on them hurts every worker.

 

·         Cut The Corporate Tax Rate From 35 To 25 Percent: A lower corporate tax rate is essential to keeping good jobs in the United States. America was once a low-tax business environment, but as our trade partners lowered their rates, America failed to keep pace. We now have the second highest corporate tax rate in the world, making America a less attractive place for companies to do business. American workers deserve the chance to make fine products here and sell them around the globe.

 

My understanding of what Obama means by “restoring fairness” is that he’ll keep the tax cuts in place that are already there except for the 2 highest tax brackets that were initiated under the current administration and add the tax credit noted above.  TECHNICALLY it’s a tax cut, just like reducing an increase from 5% to 3% is TECHNICALLY cutting spending, while in actuality it’s a tax increase on the rich (over $250,000) and a credit to everyone else—not a tax cut.  Effectively, “restoring fairness” means raising the taxes on everyone making $250,000 or more, and then giving a check for $500 to everyone else.  That’s fair?  Sounds like redistribution of wealth to me.  I’d rather offer incentives for companies to ensure their employees participate in the wealth that companies generate in the same way the executive teams of companies participate in that wealth generation.  And thanks, but no thanks, about the pre-filled tax forms.  I don’t trust the government to fill out my own paperwork for me.  That’s a “service” I’m happy to not utilize.

 

Meanwhile, McCain wants to keep personal income taxes where they are, except for the corporate tax rate.  I have mixed feelings about the corporate tax rate in conjunction with the dividends rates, because dividends are paid by corporations after taxes, so effectively dividends are taxed once at the corporate level, then once at the individual level, so as a stock holder/owner of a company and recipient of dividends, every dollar you receive is taxed at 35%(corporate level) + 15% (individual level) = 50% total tax.  I’m not sure I like that idea.  I’m also not sure I like the idea of a flatter tax structure as it now stands since the first dollar earned is generally spent on necessities and the last dollar earned is spent on luxuries.  It simply doesn’t feel fair that someone making $25,000 should pay the out more of their disposable income than someone making $250,000 in taxes.  If both households spend the same amount on necessities (say, $20,000), then 67% of the disposable income for the first household is spent on taxes ($3358.75/$5000 = 67.18%) and only 30% for the second household is spent on taxes ($68,568.25/230,000 = 29.81%).  That’s an unfair tax burden.  You know what levels out that playing field?  Dropping the second bracket down to 7% (from 15%) and raising the fourth bracket to 57.75% (from 33%).  Then both households pay out about 39% of disposable income in income tax (without deductions and credits). 

 

But neither candidate is suggesting that.

 

What got me thinking about this was Biden’s foot-in-mouth exercise of suggesting that paying higher income taxes was the patriotic thing to do, or we’ll get tax cuts and rebates to go buy toasters.  I find that to be totally asinine.  If the bleeding hearts want to pay more in taxes, they can always send in extra money and/or forgo taking any deductions and/or credits.  I don’t think that’s happening.  In fact, if memory serves there were more than a few “pay extra” funds set up by states for people who thought their tax burden was too low to send in extra money—none ever received a penny.

Tax credits can be terminated.  A restructuring of the tax rates is needed to bring REAL fairness—not merely income redistribution—back to the tax code.  And when politicians who write these codes finally start considering disposable income as taxable income, then, finally, there may be some sense added back into the mix.