Taxes and bracket creep, oh my!(warning–wonky)

My Buddy Phil Rosenberg put up a really interesting dissection of taxes and such on his website, which you can find here. This was part of a larger debate on the Sex and Politics Radio show about taxes and what gets paid. Long story short: there are  a lot of different taxes collected by different entities, and getting a handle on how much you actually pay as a percentage of your total income is rather difficult. And Mike Hovell of Sex and Politics radio has also weighed in.

Long story short–the US Tax rate is a moving target depending on income, state of residence, and needs of the government. But people who talk about paying 50% or more of their income in taxes are not in the same area code as reality. First, taxes are graduated: first few thousand gets no income taxes, second part gets hit with 10% graduated taxes, then 21%, etc., all the way up to the top rate of 35%. But under this system, nobody is paying 35% of their TOTAL INCOME IN INCOME TAXES. And (perversely), the more income you make, the less you pay in sales and FICA taxes. Put another way, Mitt Romney makes 400 times the median family income, but sales taxes are a rounding error in his income bracket because he doesn’t purchase 400 times as much as the average family. Same with property taxes and state income taxes. Put another way, the Treasury would be better off with 400 families earning what Mitt earns, because they’d be paying into FICA on every dollar, never mind the fact that (thanks to the changes in capital gains rates) taxes on  cap gains top out at 15%.

The other tax issue that doesn’t get much attention is bracket creep, something that hits people who have income much harder than people whose money comes from capital gains. The Treasury Department has been counting on ‘bracket creep’ and inflation as an invisible tax hike for decades. In 1979 the inflation rate was 10%, and if you were lucky enough to have a union (or you got a Social Security check), you got a COLA (Cost of Living Adjustment) of 10%. But that usually put more of your income into a higher bracket, so you were actually LOSING MONEY. And bracket creep is how we got secretaries and pipefitters in the same marginal tax brackets as millionaires.

Bracket Creep was supposedly ended during the Reagan administration, when rates were indexed to inflation. But that has simply accelerated the process of government understating inflation in the first place. Thanks to the decline of Unions, there aren’t so many workers who get COLA adjustments. But government has undertaken other steps to understate inflation. Under Nixon, the BLS created the ‘core inflation rate’ which doesn’t include price increases in energy or food. And Clinton ‘helped’ Social Security by adopting the Boskin Commission findings on inflation computing, which categorically understate inflation by using sleight-of-hand tricks like hedonics and weighting of product prices. John Williams, a statistician who set up a website called Shadowstats, has been relentless in trying to maintain consistent statistics across the past few decades. It is Willams’ assertion that inflation has been bubbling along at 4-8% for the past few years. So there’s still some bracket creep going on out there. Moreover, one of the more onerous taxes passed in the 70’s (as a result of news stories about hyperwealthy people not owing tax money on income) is the AMT—alternative minimum tax. It was supposed to be a sort of flat-tax on high income people, but the ‘income’ was never indexed for inflation. So now you have NY teachers and firefighters falling into the AMT. And the wealthy have figured out how to dodge income taxes (including the AMT) altogether by taking their ‘income’ in capital gains, which are currently taxed at 15%.

This has all been laid out by two reporters for the Philadelphia Inquirer.  Donald Bartlett and James Steele, who’ve spent much of the past 30 years laying out the contradictions and class warfare inherent in the current tax system, have a new book out on the issue of American tax reform. They’ve earned two Pulitzer Prizes for their efforts. It’s worth noting that for many Americans, the tax bill for FICA is now higher than what they pay the IRS. That says a lot more about the falling incomes of Americans than it does about what Romney called the ‘entitlement seekers‘.

Phil calls for a simplification of the tax system. But this misses a larger point–people in the 1%  like Mitt Romney and Warren Buffett LIKE having 500-page tax returns, because the IRS can’t afford the forensic accountants to figure out what they’re up to. Remember, that 100K accountant is deductible–and if he finds you an iffy tax dodge that more than pays his salary, it’s worth it to take the chance. Meanwhile, every single mother getting by on a waitress’ income  getting the earned income tax credit is scared to use it because the IRS has been really cracking down on even minor mistakes—and a waitress can’t afford an accountant to dispute the IRS findings.

It may take a revolution to fix this.

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2 comments

  1. Interesting article, Dan. One thing to note however, I am not calling for a flat tax–just a simplified tax system that ordinary human beings can understand. I think the wealthiest Americans would love a flat tax–I’ve seen so many pushing for it–I’m not sure they’d want a simplified, yet graduated system. Especially as I envision it, which would be rather top-heavy.

  2. Phil–I’m all for a simpler tax, and I know you didn’t ask for a flat tax (I think I stated that). IMHO the current system is deliberately complicated and opaque, the better to hide tax avoidance schemes the wealthy can game. Agreed that a more equitable system would hit high-earners more, and one way to get there would be to put cap gains back to where they were under Clinton. Another thing that would help would be to do away with the cap gains interest carried scam perpetrated under Schumer for hedge fund traders that leaves people with $100 M annual earnings paying less than their janitors.

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