The cost of reality: taxing ourselves out of debt?

A comment on a previous post suggested that, rather than attack unions or cut spending, we should just raise taxes. My gut response was “raise taxes on what exactly?”

I’m pretty sure that most Americans have no idea who is paying taxes, how much taxes they are paying, and what effect those taxes have on the economy as a whole.

Before I go into more detail, let’s get one thing straight: you do not pay taxes if you get more money back from the government than you paid in. If you paid, say, $1000 in and get $1500 back because of credits and whatnot, you did not pay taxes. If your income is exempt from taxation, you did not pay taxes. If you can claim sales tax credits, you did not pay taxes.

Now, because of the fact that so many Americans get more back in taxes than they pay in, only about 53 percent of taxable Americans actually pay federal income taxes. And, since most states base a payer’s taxable income on what income was taxable, large numbers of people do not pay state taxes either. The issue is a little more muddled at the local level, but it is safe to say that there are tens of millions of Americans paying no or very little taxes.

That brings us to the 53 percent who are paying taxes. One of the battle cries of the progressive movement is to tax the rich, yet most reliable estimates place the amount of revenue gained from those taxes at around $90 billion per year, or about 7 percent of the projected deficit in 2011. Even if all of the tax cuts were eliminated, it would only gain around $500 billion a year, or about 38 percent of 2011’s deficit.

So, what about raising those taxes even higher? I can speak to that issue personally. I already pay about 40 percent of my income in total taxation–sales taxes, excise taxes (as on gas), income taxes, etc. Ending the current tax cuts would represent a 50 percent increase in my federal taxes (because the 10 percent tax rate would cease to exist, meaning the bulk of my income would be taxed at the 15 percent rate). Further, the expiration of current tax breaks would increase my taxable income, thereby exposing more of my income to state and local taxes. In the end, this method alone could increase my tax burden to as much as 50 percent of my income, and for most Americans the effect would be similar.

What would you do if you took a 10 percent pay cut, because that’s what those increased taxes would represent. What would you have to cut? What would you stop doing? What would you stop paying?

Now, imagine what would happen if the government actually raised those rates even higher.

And, keep in mind that 65 cents of every dollar you are paying in taxes already goes into someone else’s pocket, very likely someone else who is not paying taxes, at least at the federal level.

With that picture in mind, explain how raising taxes helps us get out of debt.


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2 Responses to The cost of reality: taxing ourselves out of debt?

  1. Jason says:

    Let me start by acknowledging that I missed your original point that there is a lot of bickering about which fork to use for the salad while the Titanic is sinking. I’ll also concede to your point that the tax code is jacked up and needs to be re-written.

    Though I will point out that your source for the 53% is date and history specific. The article goes on to point out that the introduction of the Bush (W) tax cuts + the expansion of the cuts by Obama + the recession = 53% pay income taxes. The source continues with “The vast majority of people who escape federal income taxes still pay other taxes, including federal payroll taxes that fund Social Security and Medicare, and excise taxes on gasoline, aviation, alcohol and cigarettes. Many also pay state or local taxes on sales, income and property.”

    Also your statement about the 65 cents going into the pocket of someone that is not paying federal income tax is misleading. The source discusses “More than half goes to seniors through Social Security and doctors and hospitals providing Medicare benefits.” Social Security benefits are typically taxable unless they are the only source of income.

    But I’ll follow up with what I really wanted to go after but got distracted. I believe that we have a had a string of politicians (Federal, State & local) that go after the easy wins, lower taxes increased benefits (depending on your leaning), but never take a long-term perspective. Whenever a problem surfaces, the discussion falls back into the easy win category or smoke & mirrors (gay marriage, gun ownership, Julian Assange is a terrorist and should be assassinated). We need to remove the false dichotomy of Republican or Democrat. We need term limits on Senators and Representatives. Of course we also need a more involved and educated population … maybe I ask to much?

    What is the next step?

  2. dlhitzeman says:

    Jason, you are right that the sources can be taken one way or another (lies, damn lies, and statistics–we’re all guilty), but it’s hard to avoid the point that we’re paying huge amounts of money to take care of people who opted not to take care of themselves. Even if the money is going to Social Security or medical bills, it’s still redistribution of wealth from people who are paying taxes to people who are not. I won’t go into the sleight of hand that taxing federal benefits represents in an effort not to distract from your (or my impression of) your real point.

    I completely agree that our politicians go after the easy targets, which has been my central point for my past few posts on this subject. From the beginning, I have argued that the debate over union bargaining rights misses the point that Ohio is (according to the latest numbers) $8 billion in debt and constitutionally obligated to balance its budget. Further, even if the state makes $8 billion in cuts this year, it is still projected to have no less than a $5 billion deficit next year and for the following 6 to 9 years, depending on whose estimates one uses.

    If we drill down to what this really means for Ohioans (I can’t really speak for the other states), I can cite two examples:

    First, there is the known example of the City of Dayton. They just closed a $5 million budget gap on the presumption of no cuts from the state, yet the state will probably hand down anywhere from 12 to 20 percent cuts in funding, leaving Dayton still millions of dollars in the hole and with no real way to cover the gap. The city has already cut more than $3 million from police and fire. How much more will it have to cut? Even if the unions have collective bargaining rights, what are they going to demand? If there’s no money, there’s no money.

    Second, there is the yet to be known case of a school district near where I live that purportedly has just three days of operating capital left in the bank. It put a levy on the ballot last November that failed and will probably put one on this year that will fail. Combined with an anticipated 15 percent cut in state funding, the district may not have enough money to open its doors next year (AY 2011-2012) without financial intervention. Where does that money come from?

    I cite these two examples in order to lay the ground work for my case: the only way we can get out of this hole at any level of government is to accept that we are facing massive, enduring cuts. I grant that tax increases may inevitably be a part of the way things get resolved, but increases without cuts leave us right where we are.

    To me, the next step is simple: go through the existing programs and make the difficult judgments as to who is really in need of help and who is just taking advantage of the system. I understand this will cause a lot of heartache and a lot of hurt, especially for people who did not prepare for anything other than to be taken care of by the government, but the result is for everything to stop due to government insolvency, and I doubt anyone wants that.

    Further, we have to fix our plain stupid tax laws so that they get applied in a reasonable and fair way. I am not saying we should create a tax system that penalizes the poor or people of limited means, but our current tax system penalizes people for succeeding and keeps billions (maybe even trillions) of dollars out of the economy because people have learned not to try.

    Finally, and this is by far the hardest, we need to convince more people to succeed on the merits of their own effort. The whole idea behind most social welfare programs was to help people advance themselves, not hold them hostage to the programs they depend on. Social welfare must be tied to meaningful improvement because it cannot go on forever.

    Of course, I have come to believe none of this is going to happen. Most Americans are too cynical, too addicted to government benefits, and too lazy to do any of what needs to be done. We, as a nation, are going to sit by while the nation burns, and the ones who survive are going to be the ones who had the foresight to prepare for whatever comes next.

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