On Taxes, Tax Cuts, and Budgets

Tomorrow is Tax Day here in the U.S., the last day to file your 2010 state and federal taxes (or apply for an extension) without penalty. (Ed. note: This year, the deadline is actually April 18th, due to a holiday celebrated only in D.C. -PoM) The major news sources have been following the ongoing debate about the budget, over whether to raise taxes or cut spending. So much attention has been (rightfully, I think) paid to what should be cut and the ramifications of what that might mean. Tax rates in the U.S. are at historic lows, and yet all we hear about in the media – from members of Congress to political pundits to the regular guy or gal off the street – is a glossing over of raising taxes as “bad” without the same kind of careful thought toward what a tax raise actually means in practical terms.

First of all, let’s talk about the basics. The United States (ostensibly) has a graduated income tax. That means that people who earn more are taxed more. For 2009, federal income tax rates ranged from 10% at the low end to 35% at the high end, although most states will collect income tax from their citizens and residents on top of that. Most people are entitled to deductions from their gross income. The “standard” deduction for 2009 was $5700 for singles, $11,400 for married couples filing jointly, and $8350 for head of household, which might include people like single parents or other unmarried folks with dependents. You can also itemize deductions, like extensive medical expenses, contributions to charities, interest on mortgage or student loans, etc. What a deduction means is that you can lob that amount off your total gross income, then you’re taxed on the remainder (i.e.: your taxable income).

The problem with this system is that investment income – dividends, interest, stock gains, and others – are taxed at a different, much lower rate than regular income. Although the incomes of the very wealthy have risen rapidly over the past decade or so, their tax rates have actually fallen. And between tax cuts (a cut in the amount or percentage of taxes you’re required to pay), tax credits (flat or percentage amount refunds for doing certain things), and other “loopholes,” the rich end up paying fewer taxes than the poor. That is to say, by nature of being very rich, they give more dollars than the rest of us, but it’s a smaller percentage of their incomes. So you end up with a situation where Warren Buffet’s secretary pays proportionally more than he does.

So that’s the background of the (individual) tax system here in America, not even getting into the particulars of corporate taxes. According to the most recent American Community Study conducted by the Census Bureau, the median income in the U.S. is just shy of $50,000. So when we talk about raising taxes (or, God forbid, making the system more progressive), even on the “middle class,” it’s not likely to affect large swaths of our population. When we talk about cutting taxes vs. cutting programs, it’s really a question of who deserves to benefit from government: the rich or the rest of us. Earlier this year, the Center for American Progress published this great infographic that outlines some of the cuts the very wealthy have benefitted from over the past decade or more and how that compares to the cuts in programming that the Republican-controlled Congress has been fighting for. It’s enlightening.

For our budget to be sustainable in the long run, we probably do need to cut our budgets back, eliminate some truly glaring inefficiencies that exist, reduce fraud, and generally improve the way our government does business. But cutting services alone is not the only answer. We also need to have a careful and reasoned discussion about what our tax system should and could look like. As someone who recently jumped up from well below the median household income to well above (why, hello, marriage and a new tax bracket!), I am perfectly comfortable with paying higher taxes if it means our government can continue to deliver important services. Those members of Congress claiming to be fighting for people like me are really fighting for the money that lines their own pockets. It’s not the tax brackets of the median resident, or the “middle class,” or even the people making $250,000 per year they’re fighting for. It’s that top 1% of us, the millionaires, the very wealthy, of which Congress counts a higher percentage among its ranks than the general population does.

So don’t let them fool you when they rail on in the media about the dangers of tax cuts, and that they’re just trying to protect “your” money. When you hear “tax cut”, or “tax raise” for that matter, you should immediately ask – just as you would with a program cut – WHOSE taxes are being cut and by HOW much? Odds are if you’re reading this, it’s not your money (or at least not that much of it) they’re talking about.

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Note: I tried really hard to work in an appropriate place for this clip from Stranger than Fiction, but alas, it was not to be. As a reward for reading through this entire post, I leave it here for you now.