Effective Tax Rates vs Tax Brackets: An Educational Experience
I know it's been a while. Sorry about that. Life gets in the way sometimes.
Given the release today of our Fearless Leader's plan (or should I refer to him as the leader we fear..) I felt it was time to explain a little bit of how the tax laws work. Folks, it's not about the tax bracket. Plain and simple. It's all about the EFFECTIVE tax rate.
Let's look at the last several years of Barry O's tax returns. He's in the 35% tax bracket and is paying 35% right? Wrong. In fact, he's never paid 35%. You can see it here: http://www.taxhistory.org/www/website.nsf/web/presidentialtaxreturns
Truth is, Barry O has paid:
2000 - 26.5%
2001 - 31.5%
2002 - 27.3%
2003 - 21.8%
2004 - 19.5%
2005 - 32.9%
2006 - 28.2%
2007 - 33.7%
2008 - 32.2%
2009 - 32.5%
2010 - 26.3%
Doesn't look like he was wanting to help the country too much in 2010...taking a 3000 capital loss as well... By the numbers, in 2010 while he is calling for the rich to pay their "Fair Share", he in fact paid the third lowest effective rate in 10 years. Also every year he takes itemized deductions. Just to inform Mr. President - that is a voluntary deduction. You can take the standard deduction that will increase your taxes. Rather than the $373,000 you took on your 2010 return, you could have made it the standard deduction of $11,400 for Married filing joint. But you opted not to do so.
But let's look a the Democrat's reincarnation of Joe the Plumber...Warren Buffet's Secretary. Mr. Buffet makes most of his money on capital gains at a rate of 15%. Let's presume the stereotypical secretary for a minute. I know this person likely makes much more, but let's presume this is a single mom with two kids making 40,000 per year. She files as Head of Household. She gets the Earned Income Tax Credit. In the end - she will be paying $0 in tax liability and likely have a negative EFFECTIVE tax rate since she will make a profit off of the government due to the refundable tax credits (see lines 61 through 72 on the federal 1040 form).
While the calls are there to get "skin in the game" from the Prez - we're going about it the wrong way. Steve Forbes put together a plan many, many, many years ago. The Flat Income Tax. Everyone pays a flat percentage. For those in Indiana - you already know how it works. You pay 3.4% plus county tax - unless you live in Lake County. You may say that it's not fair to the poor! Uh - the first 40,000 was exempt from income tax for everyone under the Forbes plan. Herman Cain is about as close to this as possible with his 9-9-9 plan, but I'm waiting for some better numbers to come back. This plan hurts me overall. I'll see a tax increase as last year I had an EFFECTIVE tax rate just over 7%. But it's more fair to everyone.
Herman Cain this week also tackled something that nobody is willing to talk about either - Subchapter S and LLC corps. ALL of the income from these entities gets paid on your PERSONAL income tax form. Let's say you have an LLC business that made $175,000. You took a salary of $40,000. Your wife/husband has a job and made $40,000. Your AGI is now $215K. You plowed the $175K in business profit back to the business. Doesn't matter. You made on your K-1 form - $175,000. Rather than showing the $60,000 on your return, you show $255,000. You Fat Cat riding around in your private jet....
Just last week, I had federal withholdings, Social Security withholdings, and Medicare withholdings of 12.5%. Let alone state withholdings.... What would I do with an extra 3 1/2%? Pay down debt - and buy stuff. Increasing the consumption factor of the GDP rather than having the government spending component add to the GDP.
Ultimately, no new taxes is the way to go. It's more in the pocket of those that need it - and those that will buy stuff. Buying stuff increases sales taxes in the states. Buying stuff puts people back to work. Companies want tax breaks - but they want customers even more. Increased revenues at companies will lead to more hiring. More hiring leads to more payroll taxes. More payroll taxes leads to a balanced budget (as long as congress is willing to freeze and decrease the budget). A balanced budget leads to a surplus that pays off debt. Decreased debt leads to less interest payments. Less interest payments leads to a bigger surplus.
We need a bold and long term plan. Something longer than the next election in order to give our businesses some confidence. Right now, they don't know what is going to happen so they are hoarding cash. Free the businesses and you will reopen the free markets. Just wait and see what would happen.
Given the release today of our Fearless Leader's plan (or should I refer to him as the leader we fear..) I felt it was time to explain a little bit of how the tax laws work. Folks, it's not about the tax bracket. Plain and simple. It's all about the EFFECTIVE tax rate.
Let's look at the last several years of Barry O's tax returns. He's in the 35% tax bracket and is paying 35% right? Wrong. In fact, he's never paid 35%. You can see it here: http://www.taxhistory.org/www/website.nsf/web/presidentialtaxreturns
Truth is, Barry O has paid:
2000 - 26.5%
2001 - 31.5%
2002 - 27.3%
2003 - 21.8%
2004 - 19.5%
2005 - 32.9%
2006 - 28.2%
2007 - 33.7%
2008 - 32.2%
2009 - 32.5%
2010 - 26.3%
Doesn't look like he was wanting to help the country too much in 2010...taking a 3000 capital loss as well... By the numbers, in 2010 while he is calling for the rich to pay their "Fair Share", he in fact paid the third lowest effective rate in 10 years. Also every year he takes itemized deductions. Just to inform Mr. President - that is a voluntary deduction. You can take the standard deduction that will increase your taxes. Rather than the $373,000 you took on your 2010 return, you could have made it the standard deduction of $11,400 for Married filing joint. But you opted not to do so.
But let's look a the Democrat's reincarnation of Joe the Plumber...Warren Buffet's Secretary. Mr. Buffet makes most of his money on capital gains at a rate of 15%. Let's presume the stereotypical secretary for a minute. I know this person likely makes much more, but let's presume this is a single mom with two kids making 40,000 per year. She files as Head of Household. She gets the Earned Income Tax Credit. In the end - she will be paying $0 in tax liability and likely have a negative EFFECTIVE tax rate since she will make a profit off of the government due to the refundable tax credits (see lines 61 through 72 on the federal 1040 form).
While the calls are there to get "skin in the game" from the Prez - we're going about it the wrong way. Steve Forbes put together a plan many, many, many years ago. The Flat Income Tax. Everyone pays a flat percentage. For those in Indiana - you already know how it works. You pay 3.4% plus county tax - unless you live in Lake County. You may say that it's not fair to the poor! Uh - the first 40,000 was exempt from income tax for everyone under the Forbes plan. Herman Cain is about as close to this as possible with his 9-9-9 plan, but I'm waiting for some better numbers to come back. This plan hurts me overall. I'll see a tax increase as last year I had an EFFECTIVE tax rate just over 7%. But it's more fair to everyone.
Herman Cain this week also tackled something that nobody is willing to talk about either - Subchapter S and LLC corps. ALL of the income from these entities gets paid on your PERSONAL income tax form. Let's say you have an LLC business that made $175,000. You took a salary of $40,000. Your wife/husband has a job and made $40,000. Your AGI is now $215K. You plowed the $175K in business profit back to the business. Doesn't matter. You made on your K-1 form - $175,000. Rather than showing the $60,000 on your return, you show $255,000. You Fat Cat riding around in your private jet....
Just last week, I had federal withholdings, Social Security withholdings, and Medicare withholdings of 12.5%. Let alone state withholdings.... What would I do with an extra 3 1/2%? Pay down debt - and buy stuff. Increasing the consumption factor of the GDP rather than having the government spending component add to the GDP.
Ultimately, no new taxes is the way to go. It's more in the pocket of those that need it - and those that will buy stuff. Buying stuff increases sales taxes in the states. Buying stuff puts people back to work. Companies want tax breaks - but they want customers even more. Increased revenues at companies will lead to more hiring. More hiring leads to more payroll taxes. More payroll taxes leads to a balanced budget (as long as congress is willing to freeze and decrease the budget). A balanced budget leads to a surplus that pays off debt. Decreased debt leads to less interest payments. Less interest payments leads to a bigger surplus.
We need a bold and long term plan. Something longer than the next election in order to give our businesses some confidence. Right now, they don't know what is going to happen so they are hoarding cash. Free the businesses and you will reopen the free markets. Just wait and see what would happen.
posted by dickieh5150 at 11:39 PM
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