Tax Post 3: The Bush Taxcuts and the Sunset Strip

Disclaimer:  I stayed up till 5 in the morning last night.  And I got to work on time this morning.  So I'm a little out of it.

Anyway, the Bush tax cuts are a big deal right now, and our tax professor has furnished me with many excellent links and class discussions on the topic.

Let me lay it out for you.  The Bush tax cuts, set to expire in 2009, are being currently reviewed for an extension for 2010.  I think it likely that they'll get passed, because of the political clout of the angry rich.  That is a link to Paul Krugman's article on this subject.  Almost every link here will give you a better treatment of the subject than I will, but I shall press on nonetheless.

So there are a couple of ways to cut taxes.  One is to cut the tax rate.  This is the graduated percentage of taxable income that you and your employer pay out of your wages, after taking the standard deduction or itemizing, you may get something back, you may owe.  The other way is referred to as backdoor tax increase, and selacious references aside, it's a really simple concept.  If you can't increase the tax rate, the only other way to increase tax revenues is to increase the tax base.  Namely, what you can tax.  Bush I was famous for his "No New Taxes" and as Clinton would razz him for later, taxes went up.  But tax rates did not.  They just made real estate more taxable.  Anyway, that was a digression.

Bush II's tax cuts in 2003 changed the tax rates.  They also backdoored a number of other tax cuts.  That's right, you can shrink the tax base too in that manner.  Think about it as a fraction, increasing or decreasing the denominator has a directly correlative effect on the take.  Enough about backdoors.  Here's the rub, take a look at the chart below:

I was looking for bracket population data to match with these numbers but haven't been able to find much save for the fact that the first bracket grosses more than 373,000 in taxable income, and comprises less than 1% of the population.  Remember, that taxable income has already had above the line and below the line deductions from it.  It is not what you get on your pay stub.  So anyone who falls into that taxbracket likely makes at least double that and half of it isn't taxed already.

Anyway, the crux of this post is this:  The reason the Bush taxcuts are expiring is because they would have never passed through Congress if they had been completely honest.  I don't mean to infer foulplay, just dirty pool.  Per a rule established in the last decade, all budget increases have to be balanced by budget cuts.  Which means that every tax cut comes with a price tag, i.e. the money that tax isn't taking in, that 4.6 percent of the top 1% taxable income (and so on down the line).   If they'd made the cuts permanent, or if they begin extending them indefinitely, it will cost the government 700 billion dollars.  But the republithugs played this pretty smart, they knew that it's harder to enact new taxes than it is to cut taxes.  Now that the cuts are set to expire the hue and cry is to keep extending them.

Tax Post 2: How the Effect of Taxes on Economic Stimulus is Nil

I'm still enjoying tax class, but it has gotten MUCH harder.  And if anyone can point out an answer manual for the South Western book, I'd appreciate it.  I saw a "study guide" for it, for $40, but it's difficult to say whether or not it includes the answers to the practice questions.

I never understand why they don't just include the answers.  How else are you supposed to know if you're right or not?

Anyway, I've been thinking a lot about taxes.  One of the big things you learn in Macro and in Tax is that there is a very serious societal element in how we structure our tax codes.  So for example, the fact that Child Support is considered an exclusion for gross income is a sop to both working mothers, and divorced working dads.  The fact that there is something collegially known as the Innocent Spouse rule, a way for abandoned spouses to file as heads of household instead of married filing separately, which has a lower standard deduction, than head of household, allows an abandoned spouse to keep more of her income.

Ok, now as a RavingLeftatic, I think these things are nice.  But we come back to something that I touched upon in my first Tax post, namely, the concept of equability.  On the surface, these tax breaks are great.  But I'm a fairly intelligent guy, fairly well educated guy, and I don't know about half of these things.  And I could rightly be accused of stereotyping.  But give me a break, is it crazy to assume that in a nation where 28% of the populace believes that the moonlanding was staged, wouldn't know how to do their taxes?  Now, to be fair, as a single white male, I am taxed the absolute highest of any category, so the reason for my lackadaisical tax attitude might well be simple ignorance based on use.  I might well have dependents in the near future, dependents possibly including my older relatives.  How many low class, middle low class people know about the qualifying relative tests, or can perform the gross income test.  I'm reading the damn tax book and I can't figure it out.

I would certainly admit that there are some who do take advantage of these things.  And certainly, many of those people simply go to H&R block to get their taxes done because they can't be bothered with it.  But who can say how effective that is?  Roughly 65% of taxpayers use the standard deduction, 22 million Americans and Canadians filed with H&R block in 2007.  That's not a huge percentage, but it could easily include the poorest caste of American life.  Of course, the poorest caste don't even have to file if they're under the Standard Deduction limit.

Anyway, my point is this.  If taxation is supposed to have successful influences on society, than there has to be a real bias toward the middle class and the rich, people who can afford to hire a professional, or take the time to figure out how to best manipulate the tax code to best fit their situation.  That, and as we discussed from Macro, the multiplier for a dollar of tax released back into the economy is much lower than the value of a dollar directly spent.  So the next time, some pundit shouts from the mountain top how they provided a great tax break for working moms or some such, ask him if that money would have been better spent actually providing services and job training for that working mother.

TAX: The Federal Income Tax Post 1

So in keeping with my earlier desire to keep my blogging relevant to my classes, I am now enrolled in my first tax class, and my first management class.  Honestly, I don't have high expectations about the management class, I'm enjoying it so far, but that's not the same as finding it useful or learning something from it.

I'm only two classes into Tax yet, and I only received my book yesterday, so I'm not too far in yet.  Already I find it very interesting.  I think most people, myself included, get turned off from tax because of the excessive number of rules and the oppressive nature of being taxed.  Just the title of the class hits the snooze button for most people.  And yet...

Some history of the Federal Income Tax.  The first tax was established in 1861.  It was established during the Civil War, and raised some 376 million, which, in todays dollars is 9.4 billion.  It was repealed immediately following the war.  The next attempt was in 1894.  This bill was opposed by the Supreme Court in Pollock v. Farmers Loan & Trust Co. on the basis that the tax was not, as demanded by the constitution apportioned properly, and thus unconstitutional.  Than in 1909, the first Corporate Income Tax was successfuly installed, and by 1913, the 16th Amendment was ratified and made the Pollock case irrelevant.  "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration."

A couple of other interesting things:  Adam Smith came up with what we call the four canons of taxation, which are still used as general rules today.  They are
1) Equality-fair and equitable
2) Convenience-administrative simplicity
3) Certainty-easy to predict
4) Economy-nominal collection costs and minimal compliance costs

For those who prefer the flat tax, and say progressive taxation isn't fair and equitable, a very interesting argument is made in two parts.  First, the poor spend a greater percentage of their income.  Myself, as a member of the middle class spend roughly 80% of my income every year.  And that figure doesn't even include rent, which means that in many months, I actually overspend my income.  Taking 10% away from me, is much more detrimental than taking 10% from the upper class, and downright crushing from the working class. 

Second, the justification for taking a higher percentage from the middle class and the rich, is rooted in the concept, that the higher your wealth, the more you are actually able to partake in society, and so a higher percentage of tax is justifiable.  This is very much the case.  Think about it:  If I were to get an IRS field audit, I would have to hire a tax attorney to represent me.  Though there are places like legal-aid for the poor, it is undeniable that those with money, get better justice.  It is undeniable that those who can afford personal finance, brokers, and other representative expertise glean more from society than the poor and disenfranchised--And these rewards are in many cases intangible, and without apparent monetary value.  I should note that the last 100 words are so my own.

Another thing our professor noted about the flat tax is that even if a legislator were to somehow squeeze it through, private interests would then begin carving out their own exemptions anyway and we'd just be back where we were before.