What most people don't realize about taxes.

Discussion in 'Politics, Religion, Social Issues' started by classicaliberal, Nov 19, 2012.

  1. classicaliberal, Nov 19, 2012
    Last edited: Nov 19, 2012

    classicaliberal macrumors regular

    classicaliberal

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    #1
    This is an extremely simple post, with simple (yet I think rarely considered) implications. I'm sure some will respond by saying 'duh!' or excoriate me for pointing out 'obvious truths,' but I feel compelled to bring it up because after sharing these thoughts with others, its amazing to me how few actually realize the truth.

    If you've thought about and considered this often, I apologize. I'm writing it for those who haven't.

    ---

    Ok, here we go...

    When discussing tax rates with people, depending on their political persuasion, you usually end up getting one of two generalized responses:

    1) (conservative) I know, isn't it sick! The government takes almost half of what I earn!

    2) (liberal) I know, it's a good thing. Government helps people, I'm glad to pay what I pay... it's going towards good things.

    Now, the the conservative is definitely right about the rates being almost half of what they earn... if you add up income taxes, federal, state, local, sales taxes, property taxes, taxes passed through the price of goods, etc. taxation for the average Middle Class American can actually extend well beyond 40%.

    But, that's not the point... let's use 40% for now. I maintain that people on both sides tend not to see the bigger picture. People from both sides of the political aisle while mathematically accurate when pegging it at around 40%... this in fact the incorrect measurement. The number you should be concerned with is a lot bigger.

    ---

    Here's a real-world example. I'm going to use the same 40% rate in my example.

    Say Bob and Sally Thompson both have decent jobs. Sally teaches 3rd grade, and Bob is a Marketing manager at a small company. Together, they earn about $100,000 per year.

    Through various levels of taxation, using the 40% rate discussed earlier, the Thompsons have a net take-home-pay of around $60,000 or about $5,000/mo.

    Here are the Thompsons' bills:

    $1,200/mo. mortgage
    $1,000/mo. food/dining
    $600/mo. car payments
    $200/mo. insurance
    $500/mo. student loans
    $500/mo. furniture, home/auto repairs, etc.
    $200 miscellaneous entertainment, trips, etc.
    $300 retirement

    After it's all said and done, the Thompsons have about $500 left each month (or about $6,000/year) they can put in to savings, or to spend on things they wish like electronics, gifts, etc. Let's call this their "REAL INCOME".

    Now, let's consider for a moment that the tax rate was 20% instead of 40%. What would the net effect on the Thompsons financial situation be? Would it be 20% better as most would probably consider in their head?

    Actually, it would be a much bigger deal.

    If the tax rate was only 20% instead of 40%, this would mean that their take home pay was $80,000 instead of $60,000.... and with the exact same expenditures, what would their new "REAL INCOME" be?

    Well, instead of having $500/mo. or $6,000/year would now work out to be $1666/mo or $19,992/year. This would be 330% more "REAL INCOME"!!

    Not 20%, 330%! These are huge numbers. Consider for a moment what Bob and Sally could do with this amount of money. They could save their money for 10 years and buy a $100,000 house with CASH. With compound interest, they could be millionaires in less than 7 years. They could buy all their kids a college education, and their kids' kids.

    When you consider tax rates, you should never compare one rate vs. another, but rather instead what effect this rate has on actual usable funds... on REAL INCOME as I've defined it here. The lesson to take from all of this is that the next time some politican says 'we just need a few percent more' or 'think of all the government could do with that money... you aren't going to feel a few percent difference in your pocketbook'... think real hard. Think beyond just the percent they show you on the news. Do the math and consider for a moment the effect it'll have on your, and your neighbor's bottom line, on your REAL INCOME. Consider for a moment how everyone's financial situation could be better if we all had 330% more REAL INCOME! It's not a minor issue, it's something that effects us all every day!

    Liberals are right when they say that government provides value to society, it obviously does good... but the question I try to ask myself is not whether value is provided, but whether the value provided outweighs the cost... the cost that is often hidden from us either purposefully (auto-deduction from paychecks) or right out in the open, but not automatically thought about (tax rates as discussed here). I don't know about you, but I'd definitely be willing to put up with a little less government if I could have 330% more spending money, every year, over a lifetime.

    How about you? Was the difference between 20% and 330% well known to you before reading this? What would you do with 330% more spending money each month? Would you save it? Spend it?
     
  2. juanm macrumors 65816

    juanm

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    #2
    Yes, I was aware of that, like anybody who has some common sense.

    I say that if you're getting taxed 40% and not getting health care and cheap college education, you're actually being screwed big time.

    Also, the Thompsons (no apostrophe) should spend less on "furniture, home/auto repairs, etc." and more on "miscellaneous entertainment, trips, etc". Their quality of life would improve. If a new car (they are still paying for it, after all) needs repairs every month, it's a lemon, and they should get rid of it.
     
  3. LethalWolfe macrumors G3

    LethalWolfe

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    #3
    I just have time for a quick reply but discretionary income (basically what you are referring to as "real income") should certainly be taken into consideration and I think many people do which is why it's widely accepted that a regressive taxations can do more harm than good. For example, an across the board, no exemptions and no loopholes flat tax of 10% would be devastating to someone earning $12,000 as they have little to no discretionary income where as someone earning $100,000 a year has a lot of discretionary income.

    On the flip side of your position there are countries with much higher tax rates than America's where the populace enjoys a higher standard of living. Of course the devil is in the details and taxation is just one of a number of interconnected issues which makes fixing the problem all that more daunting.

    As an aside I think some of your hypothetical budget numbers are out of whack (ex. only $200 for insurance for the couple) but I think quibbling over that would derail the thread from it's overal point.
     
  4. Arran macrumors 68040

    Arran

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    #4
    If only. :)

    It works great if you only consider yourself getting an income boost. But if everyone gets a raise then prices for everything would simply go up. They'd creep up until a new equilibrium point was found and everyone pretty-much had he same lifestyle as before. Look at recent history: When cheap/easy loans became available for house buyers, all that extra money sloshing around simply pushed up house prices. Nobody got a better house - just the same old pile at an inflated price.

    The only way prices might not creep up is if everyone changed their behavior overnight and started negotiating hard for everything. I don't see that happening. Folks could haggle more right NOW if they really wanted to, but negotiating is hard work and many don't have the stomach for it.
     
  5. classicaliberal thread starter macrumors regular

    classicaliberal

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    #5
    Post critiqued as 'common sense' as I predicted, check.
    Spelling, grammar critique, check.
    Meaningless quibble over monthly cost allocation, check.

    Ok, now that we have that out of the way! ;)


    Yes.

    This amount I chose was meant to cover auto and misc. insurance only. Home insurance wrapped up in mortgage expenses, health insurance provided by employer, accounted for in revenue dollars. I think it's a reasonable number... but higher prices only strengthens the argument made in the OP.

    Thank you very much! I hope everyone else follows suit! ;)
     
  6. kavika411 macrumors 6502a

    kavika411

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    #6
    You have me interested. What is the correlation between a tax bracket and a cheap college education? Are you talking about the student, or the parent who (if the student is lucky enough) has Mom and Dad pay for everything? Does that apply to 40% tax bracket people with large assets/savings, or is it just to 40% tax bracket people with little assets/savings.

    You seem very resolved in your statement, so I look forward to your further thoughts,
     
  7. chown33, Nov 19, 2012
    Last edited: Nov 19, 2012

    chown33 macrumors 604

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    #7
    I'm curious about what you think are the other consequences of halving tax rates. Would municipal emergency services by cut or discontinued? Roads, highways, and other infrastructure maintenance dries up? What about all the public employees who'd suddenly be jobless? Water, sewer, electricity, garbage disposal? Construction contractors without contracts? Or would all those things just suddenly become more efficient? In the extreme, would there be roaming bands of homeless nomads we'd have to fortify and defend against?

    Even supposing one supports large cutbacks in, say, Defense spending, Medicare, Medicaid, etc. exactly what happens with a 50% budget cut? Lots of service personnel would have to discharged. Lots of defense contractors would do significant layoffs. Lots of medical personnel would be cut because health-care providers would only see half their normal reimbursement amounts.

    Or would all those people keep their jobs, because suddenly what Bob and Sally used to spend on taxes now goes to fund out-of-pocket expenditures? For example, things like: tolls in order to keep roads maintained, higher co-pays and deductibles on medical insurance, higher food costs because truckers have to pay more tolls to transport goods, schools that raise tuition or shut down, etc.

    I guess my question boils down to this: What are all the other effects? Clearly, halving taxes doesn't happen in a vacuum. All commerce and economic activity is interconnected to some degree. So regardless of the political aspects, i.e. regardless of whether one believes that self-determined expenditures are better than compulsory taxes, exactly what are all the other effects?
     
  8. citizenzen macrumors 65816

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    #8
    I'd like to submit this graph from the Tax Policy Center, which shows, "U.S. taxes are low relative to those in other developed countries."

     

    Attached Files:

  9. Huntn macrumors G5

    Huntn

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    #9
    The OP is clearly not focused on this. He's fantasizing about what he'd do with all the extra money he'd have if they cut his taxes and ignoring the associated negatives. Wait a minute, think how much money we'd save if we disbanded our military, stop maintaining our roads, and kill everyone over 30! ;)
     
  10. Sydde macrumors 68020

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    #10
    In some countries, AIUI, a citizen may get 16 years of school on the state. Typically, after year 12 or so, it becomes non-compulsory, so the student has to earn the right (good marks) to have their matriculation paid for. The notion is that smart people, especially in abundance, improve society in general (trickle-down brains?), so it makes sense to subsidize degrees. Assuming, of course, that education makes you smart, I have seen conflicting evidence.

    When you look at it, if the cost of letters after one's name is not oppressive, one might be disposed to charge lower fees for professional service: we all pay a little more now so that we can pay less later for what we need.

    That is the tricky thing about taxes, that sometimes paying a little more now can save us a lot down the road, or even sooner. Most of us will be seduced easily by a few bucks more now and deal with the higher costs of everything later – more of that leveraging the future for today's fête kind of thing.
     
  11. LethalWolfe macrumors G3

    LethalWolfe

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    #11
    Trust me, it's not limited to our extreme conservative members. There are a number of thread topics I outright avoid because some of the same members ('red' and 'blue') repeat their mantra regardless of how many times the facts are given to them.
     
  12. AlaskaMoose, Nov 19, 2012
    Last edited: Nov 19, 2012

    AlaskaMoose macrumors 65816

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    #12
    We we had a flat tax, those earning $12,000 would not be taxed because they fall into the poverty line. Even with the unfair tax system we now have very low income earners don't get taxed by the IRS.

    That said, each one of us, rich and poor, pay all kinds of taxes other that Income. For example, gasoline tax at the pump, tobacco tax, alcohol tax, telephone/communication taxes, 911 and other emergency call taxes, school and other local bonds' taxes, sports equipment taxes, firearms taxes, property taxes, sales taxes, gift taxes, death taxes (inheritance), and on and on. Even the very poor can't get away from some of these taxes. Then there are other taxes that aren't called taxes. For example, licensing or permits fees, etc.
     
  13. LethalWolfe macrumors G3

    LethalWolfe

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    #13
    One would hope so but a poster in another thread wanted a flat, no exceptions for anyone tax of 10%.
     
  14. jeremy h macrumors 6502

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    #14
    Ah, over a lifetime? But are you feeling lucky? Some people lead charmed lives - most don't. Tax cuts are great until they cut that bit you rely on. How much lower should US rates go?

    Also - bear in mind reduced government spending can deflate the economy, causing a spiral where you get even less tax - then even less spending etc etc

    ----------

    Um, I don't know - if it means I get to meet a young Jenny Agutter at the push of a button this idea could grow on me.
     
  15. classicaliberal thread starter macrumors regular

    classicaliberal

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    #15
    You know, I think the points you bring up are the components that everyone thinks about when government reduction is advocated. And this is why I started this thread, because people ususally weigh these costs against something like a 20% reduction in taxes, which is the wrong comparison as I pointed out in the OP. Consider losing government services, but be sure to weigh those loses against the appropriate financial gain (REAL INCOME or discretionary income) of individuals.

    Now, as far as what would be cut... the short answer would be that those services which society values least would be cut first. The very first thing that would be cut in my mind would be our expansive military. We don't need bases in Germany, in Australia, etc. We can have a effective defense with more of our troops at home. No nation-building, no policing the world. The things you mention like water, sewer, electricity, garbage, etc. would NEVER be cut because these are daily essentials that every member of society utililzes on a daily basis. Other things like welfare would have to be paired back over time.

    Government in general would become less nationalized, and more local.


    Thanks for saying I'm 'fantasizing'. I'm actually just offering a different perspective on an issue everyone's keenly aware of. I'm sorry I'm not just repeating talking point from the left which you'd undoubtedly be more comfortable with. BTW, your suggetion of 'killing everyone over 30" sadly puts your understanding of history, of basic economics, and your partisan nature in solid view of everyone here. I appreciate your candor. ;)

    Based on my own personal research, if tax rates were significantly lower the overall quality of life in America could increase significantly over the next decade. Remember, the income tax for example is a rather new experiment in U.S. history. But, this is my opinion, others will come to different conclusions... my post here is designed to simply help everyone see the other side of the coin. The services government offers are fairly apparent to us all... the cost is unfortunately rather hidden or at least takes some thought and consideration to fully appreciate the impact it has on our bottom lines.
     
  16. Huntn, Nov 20, 2012
    Last edited: Nov 20, 2012

    Huntn macrumors G5

    Huntn

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    #16
    Next time I try to be funny, I'll be sure to add a couple of ;);) for your benefit. :)
     
  17. leenak macrumors 68020

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    #17
    For someone with a relatively inexpensive mortgage, the Thompsons sure do spend a lot on groceries and eating out :) They could easily cut that by half or more.

    Anyway, your example is using a couple that wouldn't even be touched by the 'few percent more'. The people that are being targetted make more than double of your fictional couple.

    We have 2 problems that I see. Our expenses have gone up overall and although we can cut some, we do have to accept that some expenses won't go down. So we have some cuts that we can make, but we also have to allot for the expenses that we can't really cut down unless we cut out critical programs. We can look at streamlining which is always good but inevitably, our taxes should increase.
     
  18. miloblithe macrumors 68020

    miloblithe

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    #18
    The only way couple with no children making $100,000 would pay 40% of their income in taxes is if they are extremely heavy smokers and drinkers with no deductible medical expenses, no mortgage interest to deduct, no charitable contributions, etc. Maybe 35%.

    http://www.totaltaxinsights.org/Calculator

    If they have kids, it'd be even less.

    Seriously. Without putting in smoking into this calculator, how would a couple making $100,000 pay 40% of their income in taxes? What variables would you put in to get that percentage?
     
  19. chown33, Nov 20, 2012
    Last edited: Nov 20, 2012

    chown33 macrumors 604

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    #19
    How much of the overall Defense budget is being spent on those bases? I find it hard to believe you could get a 50% budget reduction even if you eliminated every foreign base. If you have numbers to support that amount of reduction, please post a citation.

    I'm not sure what you mean by "more of our troops at home". Do you mean opening new bases within US territory? Or do you mean that all personnel stationed in closed foreign bases will be discharged and revert to civilian life? Because if it's not a discharge, then you still have government costs for maintaining those new bases. And if it is a mass discharge, you then have a large influx of people without jobs, including quite a few with little or no marketable skills. For example, some people discharged from the military find their skills applicable to law enforcement, but since you've got a 50% cut, there likely won't be any openings there. In fact, quite a lot of existing civilian law enforcement would be let go (that 50% cut affects more than the DoD), causing rather a glut in the market.


    Citation needed. What is this personal research? Where is it published? Exactly what number is "significantly lower"? 20%? The hypothesized 50%? Something else?


    Actually, I think they're not.

    For example, how much of road construction and maintenance budgets come from Federal funding? Do you think of that when you use the freeway system? When you pay for gas, with its Federal tax?

    What about farm subsidies? Do you think of corn and wheat subsidies when you buy soda or bread? Do you think about the percentage of farmers who would go out of business if the subsidies were halved? Or what if the subsidies were eliminated entirely, like your example of foreign military bases? What happens then?

    When you look at your phone bill, and see the amount billed for the universal service fund, do you know where that goes?

    How about Medicare payments to health-providers? Are we really aware of the degree to which our parents, grandparents, or even ourselves rely on this service? Frankly, I wasn't even really aware of what amount my private health insurance pays for either health-providers or prescriptions. Well, I wasn't until one of my prescription meds went from being a $15/mo co-pay to a $120/mo co-pay. And that's private insurance, not even a government service.

    If the services government offers really are apparent to us all, then we should also all be quite cognizant of what would really happen if that service were to be cut in half or stopped entirely. I assert that we're mostly unaware of either the amount of service, or the effects it would have if that service were cut in half or discontinued. And by "effects" I mean both the immediate effects, as well as the long term ripple effects.

    Unfortunately, I think most people, including many businesses, are largely unaware of all the effects government services have on their bottom line. It would be nice if it were otherwise, but it isn't, and I have no idea for a plan that would make it so.

    I mostly disagree with this, too.

    I'm self-employed, so every year at tax time I see exactly what I pay in income taxes. Every quarter I see exactly what my estimated quarterly payment is. I also see what I pay in sales taxes (equipment, parts), gas taxes (tracking mileage and fuel costs), and property taxes. Because my income goes up and down from year to year, I also see the effects of a boom year or a bust year on my tax rates.

    Maybe that makes me unusual, but I'm hardly the only self-employed person I know. Some of us even share the same accountant, who is another self-employed person.

    What I think would be unusual is to find someone with a complete and clear idea of all the government services they really receive. And it would be even more unusual to find someone who has a real contingency plan should they stop receiving those services at the current level.
     
  20. leenak macrumors 68020

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    #20
    Not only that but if you put money into a 401k, that amount isn't taxed (yet). We put the max in every year so it reduces our overall taxes.
     
  21. miloblithe macrumors 68020

    miloblithe

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    #21
    Edit, I just realized that calculator overestimates. For example, I plugged in some variables and got $31,275 in taxes which it said was 38.1% of income in taxes, but it's taking as the denominator federal adjusted gross income, which is about $81,000 for a couple making $100,000. So it's really closer to 30% in taxes, realistically, for a childless couple making $100,000.
     
  22. ugahairydawgs macrumors 68020

    ugahairydawgs

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    #22
    Double edged sword when you factor in that we are borrowing a large chunk of the money we're spending.
     
  23. McGiord macrumors 601

    McGiord

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    #23
    Mixing different government services with personal services that you are entitled as tax payer can be confusing and disproportionate to your income.
    For example, if someone is disable will use more services and tends to be receive more health benefits, and someone that is healthy despite its income, will require the same amount of health services as someone that is rich or poor, but using the government health services, therefore justifying that a percentage of your income is the base to fund his programs is nonsense.
    Some taxes should be based on a per person quota and not a percentage of your personal income, and maybe some exceptions for people with real disabilities.
    Now other services should be optional, and you as a citizen decide if you want to use the public services or go to a private service, so if someone is rich and don't want to fund public schools it should not be contributing to it, as it is not using those services. However to help people that is poor the school funds should come through other tax sources, like corporate taxes and so on...
    20% of 10,000 is not the same as 20% of 100,000, or 20% of 1,000,000. If someone is capable to obtain an income that big, why it has to be penalized with giving away more money when in reality as a person will use the same amount if personal services, because someone is rich why it has to pay more? Being. Rich makes you read more books at the library than being poor? So you have to pay way more than others?
    Per person vs. percentage is significantly different.
     
  24. leenak macrumors 68020

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    #24
    To me, it is what is best overall for the society. I don't have kids, I pay a lot of property taxes. I am ok with that.

    My husband and myself are in relatively good health, we get insurance through our employers, if I have to pay taxes to cover health insurance of those in need, I am ok with that.

    Libraries, public schools, public parks, community health facilities, services for the poor, etc, etc are all things I think are good for society and I think we should be able to establish for our citizens regardless of their income. I personally don't mind that I pay more taxes than someone who makes less than me because overall I have more disposable income. I have a healthy retirement plan, I have a nice place to live, I can afford food, I can afford luxuries, why not give a little extra to the overall benefit of society?
     
  25. McGiord macrumors 601

    McGiord

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    #25
    A little extra is a relative amount.
    I am saying it is not fair to pay more, if you voluntarily want to, that should be allowed and to certain extend be a give and take system, but not having all the burden in a particular sector of the population, fair has to be fair for everyone when it is for something that is per person based. For infrastructure and common things, that is something else and not personal taxes but business/corporate related taxes should fund them. I just wish more companies think and act like you describe, they do have real power to turn around the economy and once the money starts to flow.
     

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