April 15, 2006

How We Phrase the Taxation

Justin Katz

I have to admit that Froma Harrop's rhetoric, in the following single instance, does resonate a bit for me:

The centerpiece is the lowered tax on investment income, which Republicans are trying to keep at 15 percent. As a result, the idle rich living off their stock portfolios are taxed at 15 percent, while the working husband and wife, each earning $40,000, pay a marginal tax rate of 25 percent. Even Ronald Reagan was content to have dividends and capital gains treated like "sweat" income.

Of course, she fails to leaven her attack with another perspective: Harrop would have that working husband and wife (hardly sweating their bills with a household income of $80,000 a year), as they seek to get ahead and to plan for increasingly investment-based retirements, taxed to earn the money and then taxed again to grow it. The fair rates for either round of taxation are certainly arguable, but the Harrops of the world too often gloss over the reality that life's inequities are more fundamental than the tax code.

Those who do not work for a living (a group in which some might be tempted to include professional opinionists) will find themselves in better circumstances no matter the socio-economic scheme under which they live. What progressives too often fail to see — beyond their narrow-eyed focus on "progress" — is that the rich will overstep new obstacles with ease, while those attempting to emulate their strategies, in a small way, will stumble and fall.

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Something that might be worth pointing out here is the use by Harrop of the word "marginal" (as in "marginal tax rate of 25%"). Because of our system of so-called progressive taxation, a significant portion of that $40,000 in the example cited is not taxed at all; some of it is charged at the 10% bracket; and some at the 15% bracket (the last time I checked) and then the remaining small "marginal" amount is taxed at 25%. It is a small amount of the $40,000 that is indeed taxed at 25%.

My point is that her use of words without describing their meaning would lead an ordinary person to assume that a couple making $40,000 a year is paying a tax equivalent to 25% of their income -- and therefore cause one to assume that the "little guy" is getting the short end of the stick. In total, with the various exemptions, it's probably a lot closer to the 15%, if not actually less than that (I can't do the calculations, as I'm not sure where the brackets are at present).

On the other side, the capital gains tax kicks in from the first dollar made. At present it is 15%, so a person who made $100,000 would pay $15,000 in capital gains. No "marginal" rates to confuse the issue here. Everyone pays the same rate, whether they made $100 or $100,000,000,000. Plus, the whole concept that people then "do" something with that money, like creating jobs, investing it, etc. is totally missing. It's not like they throw all their gold in a giant moneybin and swim around in it all day ala Scrooge McDuck.

I think Froma is smarter than she likes to let on, and probably actually knows the distinction, but simply failed to include it, as it doesn't tend to back up her argument. Liberal bias at it's best.

Posted by: Will at April 16, 2006 1:04 AM

The conversation should be "why aren't all federal tax rates capped at 15?"

Yes,with that "progressive taxation" scheme the $40/80,000 couple doesn't pay a 25% income tax rate on every dollar they earn - but when one considers payroll taxes - 7.65 employees / 15% self-employed (an economists will tell you that in actuality the wage earner also pays the 15% rate) - our hypotethetical couple is around 25% federal tax for every dollar they earn.

When you get right down to it, federal taxes aren't as "progressive" as portrayed, it's just that "FICA" is spun out as a separate line item to fool the masses.

Posted by: Tom W at April 16, 2006 10:12 AM

Upon getting my first paycheck: Who is FICA? and why are they taking my money! :)

Posted by: Will at April 17, 2006 2:23 AM