We all have heard (or read) how middle class wealth has been devastated over the past quarter century. Even now, as the economy seems to be perking up, it’s only the very wealthy that are seeing those gains. Mostly because the stock market is way up (interest rates are so low, it’s the only place for the wealthy and the retired to park their funds)- and housing has still not recovered (which is where the bulk of middle class wealth is found) to those pre-2009 levels.
Now, comes the CBO (Congressional Budget Office- one of the truly non-partisan agencies) to explain that the tax code benefits the rich. Oh, I know- you’ve heard the wealthier folks complain how they pay all the taxes. Because we never count the Medicare and Social Security taxes that are heavily skewed to the lower levels. (It’s a straight 7.65% on the first $ 113,700 of wages; Medicare taxes of 1.45% continue, and now, social security picks up again at $250K for married folks at 0.9%.) Let us not forget that our tax code provides half of its special deduction benefits to the top 20% of all earners (which is even more beneficial to those at the very top).
What benefits skew to the rich? Let’s start with health care. Most low wage earners don’t even get free health care- but those at the upper end of the income scale do receive health care- and better health care benefits, besides. Those employer provided health insurances shield some $ 86 billion in compensation from the tax rolls for the top 20% of wage-earners and $ 260 billion overall. (Just so you can compare, the bottom 60% of wage earners accumulate $ 100 billion of the total tax saving- about the same as that top 1/5.) The next most expensive tax-free benefit is pensions, which shield about $ 140 billion- with more than half of that tax-advantage accruing to the top 20%.
Regarding deductions (and not income exclusions), the biggest culprit are the deductions of state and local taxes ($ 80 billion) – and virtually all to the benefit of the top 20%. That same skewed benefit occurs with mortgage interest ($ 70 billion), not surprisingly since most low wage earners can’t afford to purchase a home.
Let’s also not forget those special rates we offer for capital gains and “qualified” dividends, which reduce of tax collections by about $ 50 billion. But, on the other hand, that’s about the same amount that the earned income tax credit provides for the lower echelon wage earners, so we can call that a wash.
And, when you hear someone say the poor don’t pay their fair share of taxes? Really? What does this graph tell you?
From a fairness perspective, I agree 100%. I am a big fan of the postcard income tax, whereby there are just three lines:
1. Total income during the year.
2. Subtract base amount (let’s say the first $20,000 on which no income tax is due, so as not to pulverize the low wage earners)
3. Pay x% of remaining income in tax (no exceptions, no exemptions, everybody equal percentage).
Sure, many accountants would have to find more useful employment, something that would actually contribute to society, rather than just consume resources (their labor).
David Leonhardt recently posted..Duct tape – a frugal parent’s best friend
Well, if we were to adopt that (I can see charities, real estate agents, stockbrokers, and the general population of taxpayers howling), then the percentage would only have to be 14%. Oh, and we would have about 3 times the foreclosure rate on homes as we had during the height of the crisis, since most folks could no longer afford their homes without the mortgage deduction.
I’m not good with graphs, does this mean we’re being screwed around with?
The reason I have built a home in Mexico is because the COL is about 35% lower overall. There are the down sides as there are with any lifestyle adjustment, but they are much less than the problems I face trying to make my retirement dollar work in the States.
Chef William recently posted..Flour Tortillas
I am not sure what you mean by screwed with, Chef William.
But, there are a slew of folks running around saying that only the rich pay taxes, they claim the rates are too high, and that the poor don’t pay any taxes. As the graph shows, if we break the population into 5th’s, it’s pretty even (ok, the poor pay a slightly higher percentage of their income to taxes- because they lack the ability to itemize) across the board- at LESS than 20%. That says it all, right there.
Some of us are using our savings to live on to supplement shabby incomes. It really sucks when savings are as taxable as income.
Ann Mullen recently posted..Senior Care Video #6: Handling Hallucinations — Alzheimer’s
Ann:
Come on, now. Savings are NEVER taxable as income. Because you already paid taxes on that money you put away. We only tax items ONCE.
Well explained. But… pet peeve: EIC. WHY, oh, WHY should someone who’s only had 5K pulled out of their paycheck that year get back 10K? It infuriates me. Granted it DOES benefit me if they use it for auto repair (have seen that happen) but more often I see very wasteful expenditures by those getting back this money. And WHOSE money is it they are getting?
Alessa…
I am having a real problem here. The maximum anyone can get from EIC is under $ 5891 (down to $ 475 for no children)- and that’s for someone with three children and under the poverty level. The choice was made to provide them these funds, so they won’t go on welfare, which is a bigger burden (for the state).
So, given those facts, it benefits you for not shelling out additional funds for welfare. And, this has been the practice for more than 30 years- through Republican and Democratic administrations (although it is a Republican idea).
It is NOT up to you to determine how they spend their money. Just like it’s not up to me to determine how the rich spend theirs- as long as they pay their taxes….
I find the whole tax issue to be confounding. Your graph helps to break it down and prove that the most wealthy are not the biggest contributors based on percentage.
Actually, all the individual taxpayers by quintiles pay about the same. It’s the corporations that are paying less, Suerae.
Again, it is a difficult subject. One of the arguments that the ‘rich’ are making over here is that they prefer to give to charities rather than pay more taxes, because the tax money is sometimes not used very efficiently (that’s actually a bit of an understatement).
There is a debate in the UK about the fact that not only do the ‘rich’ have to pay their kids’ school fees, for instance, but also the state schools (through the taxes). In short, they say that they are making ‘other’ contributions (or they are not spending state’s money but still have to pay taxes) that do not appear in the graphs. I don’t know whether it is a valid argument (what are the numbers?). What do you think?
I also think that the many loopholes allowing billionaires to escape from the taxman need to be closed.
MuMuGB recently posted..The Side Boob Issue
Muriel:
If you examine where the 1% provide their money (when they do), you will see that those agencies are no more efficient (and, perhaps, significantly less so) than the government may be. I do not know how schools are funded in the UK, but in the US, most local revenue (which is the bulk of funding for schools) comes from real estate taxes. And, it is immaterial whether the home owner has children in school or not. The concept of “commonwealth” means that the taxes are collected for the common good. And, whether one has children or not, local revenue pays for schools. We seem to progressing (sic) backwards, when folks deliberately try to cut taxes and services- so that they can “keep more of their money”- and then let “the others” cover the needs of the society.
It’s the same here in Canada. The rich get richer and the poor get poorer. Alas!
Carol Tomany recently posted..Firenza
I believe the driving force in Canada is the over-reliance on sales taxes, which cost those at the lower ends a higher percentage of their income, Carol.