Tax Policy: Now With Facts
This kind of reporting from the Associated Press is just incredibly frustrating:
Obama has said his tax policies would cut payments for 95 percent of working Americans, while increasing them only for families making more than $250,000 a year. McCain has argued that 40 percent of Americans don’t pay income taxes, either because they are seniors or don’t meet minimum earnings thresholds, so the only way to cut their taxes is to give them various credits.
Imagine a crazy world in which reporters not only told you what candidates say but also made an effort to tell the audience what the truth is. Crazy idea. Weird stuff. Fortunately, there are blogs. Here’s a chart from the Tax Policy Center’s analysis of the McCain and Obama proposals:
What’s the more interesting fact here? That Obama says his plan will cut taxes for 95 percent of the population or that his plan does in fact cut taxes for 95 percent of the population? You can be the judge.
Meanwhile, as John McCain says, it’s true that forty percent of the workforce pays no net income taxes. But everyone who works pays payroll tax. Payroll tax is a tax, ergo if you work you pay taxes, ergo if you work you could receive a tax cut. It’s true that the method by which you deliver tax cuts to people with no income tax liability is via a refundable tax credit, but that doesn’t change the fact that you’re talking about reducing the tax burden on people who pay taxes. You’re offering them a tax cut, in other words. Or as McCain puts it, “socialism.” Meanwhile, George W. Bush is nationalizing banks and John McCain wants to buy up bad mortgages so that those who currently own them don’t need to pay any financial penalty for their unsound lending practices.
30 Responses to “Tax Policy: Now With Facts”
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October 19th, 2008 at 10:37 am
I seem to recall reading that the AP made a conscious decision to become Fox-lite. I’m paying less attention to what they have to say as a consequence.
So, apparently, are the Tribune papers that canceled their service yesterday.
October 19th, 2008 at 11:07 am
not only are payroll taxes taxes, it is the official position of the bush administration that the IOUs from the government to the social security trust fund have no meaning, which is to say that to the bush administration (and john mccain has never differed with them on this), payroll taxes ARE income taxes.
October 19th, 2008 at 11:13 am
One thing about McCain’s plan of the government buying up bad mortgages is what happens if people still default on them. There are bankruptcy rules that can discharge debts between a home owner and lender. But what happens if the lender is now the government and it decides to treat foreclosures the way the IRS treats back taxes owed by people? This is especially true if the government bought those mortgages at a high price and is under pressure not to show high taxpayer loses. Just wondering.
October 19th, 2008 at 11:13 am
Matt,
In the interest of being pedantic, I proclaim that Obama’s plan does not cut taxes for 95 percent of the population.
Here’s how the Economist put it:
“Fact-checkers quibble that, according to his written plans, he really means 95% of families with children, not 95% of Americans. But his real sleight-of-hand is to count handouts administered through the tax code as “tax cuts”. You might think that a tax cut means keeping more of what you earn. The way Mr Obama uses the phrase, however, it can also mean being given a chunk of money that someone else has earned. That is how he is able to offer “tax cuts” to “95% of Americans” when about a third of American households already pay no federal income tax.”
October 19th, 2008 at 11:14 am
Yeah, but your response is almost as misleading as McCain’s is, but in the opposite direction. You’re not mentioning that a refundable credit for those who don’t work is something different than a “tax cut” and is as much like “socialism” as any other direct benefit program (which is to say, not that much unless you’re a wingnut).
There’s a lot of people who don’t work at all, such as the retired and the disabled. Neither pay the payroll taxes and a refundable tax credit available to them is exactly the same as a not-tax related government benefit paid directly to individuals. This is why the Earned Income Tax Credit includes the word “earned”—only if you have actual working income meeting a minimum requirement are you eligible for the EITC. Only workers get that refundable credit, and thus it is a tax-cut (assuming it never exceeds the amount an individual paid in payroll taxes).
I’ve not looked at Obama’s proposal, so I don’t know if there’s a work requirement for his refundable credit. Assuming that McCain’s attack is credible—a risky assumption, to be sure—then apparently Obama’s proposal doesn’t require work income. To the degree that non-workers are eligible for the credit is the degree to which his criticism is valid…and that number is not small.
However, if you’re not a loony, neo-Hooverite conservative, then allowing non-workers to be eligible for this credit would be a good thing during this economic climate. As Matthew has written extensively, we’re going to need large and wide-ranging government spending to act as an economic stimulus—a refundable tax-credit available to everyone would be great.
On the other hand, under normal economic conditions my support is lukewarm. I’d prefer a fairly low upper income limit test for eligibility—a test that includes all sources of income, including capital gains and the like. Then this would be a refundable tax credit available to all poor people and would be a significant contribution to the safety net. It’s true that limiting it to the poor invites conservative class warfare attacks—the “give everyone a piece of the pie” strategy for the long-term political viability of a benefit has considerable wisdom. But it means a lot of money given to those who don’t need it…money that could have gone to those who do.
October 19th, 2008 at 11:20 am
But what…if the lender is now the government and it decides to treat foreclosures the way the IRS treats back taxes owed by people?
What specifically are you referring to here?
October 19th, 2008 at 11:27 am
This how it is in my mind. Anyone working that has taxes withheld regardless of whether they get it back after filing, is paying a tax. That money is taken by the governments on a weekly basis “Interest Free” to be used all year long. They give all or some of it back without paying any of us interest for the use of our money.
October 19th, 2008 at 11:29 am
But what…if the lender is now the government and it decides to treat foreclosures the way the IRS treats back taxes owed by people?
What specifically are you referring to here?
Sorry, I should have finished my thought. What I wanted to say was that distressed homeowners may get a better deal from private lenders than from the government if they have to give up their house. I don’t know that for sure but it would seem to be a possibility.
October 19th, 2008 at 11:38 am
What I wanted to say was that distressed homeowners may get a better deal from private lenders than from the government if they have to give up their house.
I can’t speak for anyone besides myself, but in my personal experience the IRS offers far better and more flexible terms for debt repayment than any private lender I’ve ever dealt with.
October 19th, 2008 at 12:18 pm
McCain’s playing with fire in a major way here. His ads are blatantly stating that folks making $40,000/yr don’t pay any taxes. They’re saying that these people need “welfare” … that’s a real quote from his ad! Imagine an Obama ad where someone behind the camera asks an elementary teacher, for instance, “Did you know that John McCain thinks you don’t pay any taxes?” and the teacher responds, “How out of touch! I invite him to come look at my paycheck sometime. I support Obama because he knows that all Americans need tax relief.”
October 19th, 2008 at 12:39 pm
Payroll tax is a tax, ergo if you work you pay taxes, ergo if you work you could receive a tax cut. It’s true that the method by which you deliver tax cuts to people with no income tax liability is via a refundable tax credit, but that doesn’t change the fact that you’re talking about reducing the tax burden on people who pay taxes.
Treating the “refundable tax credits” in that fashion doesn’t change McCain’s point, though. Instead of cash from refundable credits being a “government giveaway,” instead Social Security becomes, in whole or in part, a government giveaway rather than a forced savings plan. One might think that this is a good idea or not, but calling it a tax cut seems odd.
October 19th, 2008 at 12:55 pm
The $250,000 seems high. Isn’t that about 5 times the median household income? Giving such people a tax cut when deficits are going through the roof seems extravagant.
October 19th, 2008 at 1:46 pm
Tax Comparison between Mean Income of $44,000.00 to $250,000.00 under our current tax plan.
If a couple makes $44,000.00 that puts them in the 15% Tax Bracket let’s assume they are in the category of Married Filing Jointly with only standard deductions then they will owed $5,798 in taxes which is really only 13.17% tax paid after deductions.
Now let’s look at the other couple that makes $250,000.00 that puts them in the 33% Tax Bracket let’s assume they are in the category of Married Filing Jointly with only standard deductions also then they will owed $61,229 in taxes which is really only 24.4916% tax paid after deductions.
The couple making $250,000.00 makes 468% more than the couple making $44,000.00
Yet, the couple making $250,000.00 only pays in actuality 11.32% more than the couple making $44,000.00
After standard deductions the couple making $250,000.00 gets an 8.51% decrease in their tax.
After standard deductions the couple making $44,000.00 gets a 1.83% decrease in their tax.
Therefore the couple making $250,000.00 gets a discount of 6.68% more than the couple making $44,000.00 even though they make 468% more.
If each couple were to share the tax burden 50/50
This means that the couple paying 13.17% of their income is paying a 55.94% share of the taxes with the couple that the couple paying 24.4916%.
Therefore, the couple making $44,000.00 is actually paying 5.94% more than the couple making $250,000.00 under our current tax rates.
This is why we need a change and this is how we the middle-class carry the tax burden now. Our current tax plan is welfare for the top five percent.
October 19th, 2008 at 2:23 pm
Correction “owed” should be owe.
October 19th, 2008 at 3:29 pm
It’s true that the method by which you deliver tax cuts to people with no income tax liability is via a refundable tax credit, but that doesn’t change the fact that you’re talking about reducing the tax burden on people who pay taxes. You’re offering them a tax cut, in other words
No, I don’t think so. You’re sending them a welfare check from the IRS. It’s not a reduction of their tax burden in any way; they still pay the same amount of payroll tax. McCain’s woefully failed to explain that Obama plans to throw tons of giveaways at people who don’t pay income tax. It’s not just one tax credit, it’s about six. You can even get his college tuition tax credit without paying income tax. (By the way, all that tax credit would do is cause colleges to jack up tuition.)
October 19th, 2008 at 3:57 pm
Tamara,
I’m sympathetic to your conclusion that the rich should pay more taxes, but the math you’re using to make the point is wrong or at least misleading. When you say:
“The couple making $250,000.00 makes 468% more than the couple making $44,000.00
Yet, the couple making $250,000.00 only pays in actuality 11.32% more than the couple making $44,000.00″
According to your tax calculations (which I haven’t checked), the middle-class couple is paying $5,798 in taxes, and the rich couple is paying $61,229 in taxes. That means the rich couple is paying 956% more than the middle class couple, not 11.32% more as you state. ((61229-5798)/5798))=9.56, or 956%.
The way you got 11.32% was by subtracting the percentage of their total income that each couple is paying– so you are describing the difference in percentage points, not the difference in the absolute amount they are paying. That’s fine, but it is misleading to compare that number to the 468% difference in their total income.
The way you calculated 468% was by dividing the difference in their incomes by the income of the middle class family ((250000-44000)/44000)=4.68, or 468%. When you are calculating the differences in the taxes they are paying as percentages, you need to calculate it in the same way in order for it to be a valid comparison. In other words, you need to calculate the difference in the taxes they are paying, divided by the amount in taxes that the middle-class couple pays, which gives you 956% as shown above.
October 19th, 2008 at 5:40 pm
Tamara,
This is why we need a change and this is how we the middle-class carry the tax burden now. Our current tax plan is welfare for the top five percent.
Er, according to the CBO, the share of federal taxes paid by the top 5% of households by income increased between 2001 (the year Bush took office) and 2005 (the latest year for which is reports data) from 38.5% to 43.8%. The share paid by the middle income quintile fell from 10.1% to 9.3%. In fact, the share of taxes fell for the four lowest income quintiles, and increased only for the top income quintile.
The table goes back to 1979 and clearly shows a large long-term shift in the federal tax burden away from the poor and middle class and on to the rich. In 1979, the poorest quintile paid 2.1% of federal taxes. By 2005, that had fallen to 0.8%. Likewise, the share of taxes paid by the middle quintile fell from 13.2% to 9.3%. But the share of taxes paid by the richest quintile increased from 56.4% to 68.7%. And the share of taxes paid by the richest 1% almost doubled, from 15.4% to 27.6%.
October 19th, 2008 at 5:59 pm
Linear C
Sorry to be misleading. What I was trying to show was first the difference in incomes and secondly the difference in the tax brackets and what each actually pays in those brackets. Then finally, the cost of the percentage to each couple. I guess I did not do what I intended.
In plain and simple terms, the widow’s mite is a much greater sacrifice than the rich man’s gold that is paid from his abundance.
I promise to leave the math to those better qualified than me from now on. My tax figures come from http://www.moneychimp.com/features/tax_brackets.htm tax calculator that page also shows the federal tax brackets.
Thanks, Tamara
October 19th, 2008 at 6:16 pm
Tamara,
In plain and simple terms, the widow’s mite is a much greater sacrifice than the rich man’s gold that is paid from his abundance.
In other words, money has decreasing marginal utility. The first $20,000 of income makes the biggest difference to your life. The second $20,000 is less important (provides less utility). The third $20,000 is less important still, and so on.
But of course, this cuts both ways. If money has decreasing marginal utility, dollar comparisons overstate inequality. A family making $40,000 isn’t really twice as well off as a family making $20,000, if “being well off” means utility rather than simply number of dollars.
The rich aren’t really as rich their incomes make them seem. The poor aren’t really as poor. And every extra dollar you take from the rich to give to the poor provides less benefit than the previous dollar.
October 19th, 2008 at 10:46 pm
Mixner,
The rich aren’t really as rich their incomes make them seem. The poor aren’t really as poor. And every extra dollar you take from the rich to give to the poor provides less benefit than the previous dollar.
Hum,the single lady in my office that makes $10.75 with 4 children under the age of 16 and no consist child support seems pretty poor to me and she seems to feel that every dollar is just as beneficial as the first. When I gave her a no interest loan to buy a dependable car she was very grateful and just this month when she paid the loan off she was filled with pride to have paid her debt. The loan agreement was very lax basically pay what you can when you can. So when she received extra money like unexpected child support she made a payment and sometimes she would go a month or two without making a payment. I am sure that I am as rich or richer than I seem to her. You see, I have been in her shoes as a single mother but with only two children making $6.00 an hour about 15 years ago. When you are hungry every bite is just as important as the last, because you never get full. If each extra dollar has less benefit then why do the rich hoard their dollars. I have never seen a U-haul following a hearse.
October 19th, 2008 at 11:24 pm
Tamara,
Well, make up your mind. You’re the one who suggested that the benefit provided by money is subject to diminishing returns. If “every dollar is just as beneficial as the first” then–to use your quaint phrasing–it’s just as great a sacrifice for a rich man to give up a dollar from his abundance as for a widow to give up a dollar from her mite.
I don’t believe that. I think you were correct the first time, that the marginal utility of money declines, that an extra dollar provides much greater benefit to a poor person than to a rich one. But that means inequality is much lower than it seems, which dramatically weakens the case for redistribution.
October 20th, 2008 at 12:47 am
Mixner
It was much easier for me to loan the money for the car than it was for my co-worker to repay the loan. The dollar is still a dollar. How does this weaken the case for redistribution?
October 20th, 2008 at 2:48 pm
It was much easier for me to loan the money for the car than it was for my co-worker to repay the loan. The dollar is still a dollar.
I just explained why. If each dollar is worth less to you than to your co-worker because you have more of them, then you’re not so much richer than he is as your dollar-wealth would suggest. And she’s not as poor as her dollar-wealth would suggest. Moreover, each additional dollar that you give (or loan) her is worth less than the last. Redistribution is subject to diminishing returns.
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