Politicians and Taxes
Note: I’m not even going to try to avoid politics in the next week and a half. It’s impossible. Everything about the economy is coming down to these two guys who won’t be able to do most of the stuff they’re going to say they’re going to do, but hey, at least it gets some discussion going.
One of the biggest issues in this election is taxes. In an economy burdened by dropping home prices, tight credit, an expensive war, and government bailouts, citizens are justifiably concerned about how much of their money will be scooped up by the government.
Both candidates have similar stated goals (grow the economy, middle class relief, get out of this crisis) but they have very different ideas about how to reach those goals from an income tax standpoint. They also both say that the other guy has got it completely wrong. What’s a poor voter to do?
Yesterday over at MoneyNing, there was a nice little table posted that broke down what taxpayers at different income levels would pay under each candidate’s proposed plan. I went poking around online and found a similar table from CNN/Money in June of this year, which is reproduced below.
Now, this chart isn’t perfect because the only point at which the numbers in that chart are valid is when you’re at the very top dollar within the given range. That’s because it’s a representation of the marginal tax rates, which we’ve discussed before. It’s a stairstep system, remember. Still, it’s a good representation of the real impact of each candidate’s plan would be as far as federal income tax burdens.
The single most important thing to remember about both of these plans is that they apply to adjusted income. The tax rates in both candidates’ plans do not apply to your family’s gross income. If your combined household salary is $55,000 (about the national average), you are most likely not going to pay taxes on that amount. Personal deductions, deductions for children, mortgage interest, pre-tax contributions to retirement plans or flex spending accounts - all of these adjustments (and many more) lower your final adjusted income and therefore lower the amount of taxable income.
That’s important to keep in mind because the fundamental debate over taxes comes down to whether or not raising taxes is a disincentive to ambition. The basic argument is that if we have a progressive tax (higher incomes are taxed more), people will simply choose to not take that next promotion or start that business. That is, in effect, the whole Joe the Plumber debate, right?
According to this chart, McCain’s statement in New Hampshire recently that he would not raise taxes for anyone is apparently true. Unfortunately for him, that statement doesn’t take into account that by most polling numbers, he will be facing a strong Democratic majority in Congress if he wins. What he says he wants to do and what he would actually have the ability to do, therefore, are two very, very different things. His plan can be read here.
Obama’s plan is to not raise taxes on anyone until you see salaries of over $250,000 and according to this graph, this also appears to be true. The slight increase given in the table comes from the current tax tables actually starting below $250,000. Still, it’s interesting to note that even up until a household hits $600,000, Obama’s not exactly digging deep into pockets.
Bearing all of this in mind, let’s ponder for a moment.
If we have Joe the Plumber who thinks Obama of Locksley is going to take away his American Dream, what should Joe do?
One course of action would be to simply forget about buying that business and stay an employee of a plumbing firm for the rest of his life. That is what critics of Obama’s plan say will essentially happen - hardworking ambitious Americans will simply give up the dream and stay worker bees forever. I don’t think it’s true in general because I have faith in the innate drive people have to grow, but I’m sure there are some who will decide that it’s not worth the hassle.
Another plan would be to buy that business and work as a sole proprietor until he hits that $250,000 a year magic number (ADJUSTED, remember) and then take the rest of the year off. Also not exactly a shining example of American gung-ho drive and probably quite impossible to do as a single person plumber, but also not an irrational plan if he thinks he can pull it off.
But there’s a third option, and that’s the one that seems to be getting lost in the shuffle. The third option is that Joe buys his plumbing business and then uses all of the tax advantages he can to keep his taxable income below $250,000, and those resources are considerable. Wages to hire employees, equipment, vans, trips to see vendors, trade show expenses, sponsorships for local charity events - the list goes on and on. By taking this path, Joe not only reduces his taxable income, he also provides jobs and helps his community and charities of his choice.
McCain also believes that Joe should invest in his business and community, but he believes that the best way to accomplish that is to simply lower Joe’s taxes and let him choose where he’ll invest or donate. I don’t disagree with the idealism of this belief at all. In the long run, it is beneficial for Joe to invest in his community - more jobs, better incomes, less people living in poverty all mean there are more people who can build out their basements and install a bathroom or upgrade their current bathrooms and kitchens. The question comes down to whether or not individuals will work towards a long term goal as a trade off for short term luxury without an incentive (or disincentive, as the case may be) to do so. My personal belief is that when we don’t spread at least a smidgen of the wealth around, what we end up with is a growing gap between the rich and the poor, which ultimately is unsustainable. Look around.
OK, just one more issue, as this post has gone on way too long already.
When taxes get cut in one place without a cut in spending, we have a problem. One only has to look at the debt clock running out of numbers to see that the government has run amok. I’m here to tell you that if we see a large drop in personal income taxes and corporate income taxes at the same time, you WILL see your property taxes go up, your sales taxes go up, your local income taxes go up, and (if you have them in the first place) your state income taxes go up. You will see more bond referendums in your elections in order to pay for roads, schools. We all know this at a common sense level, because we know that if our own personal incomes go down, our spending has to go down as well. Somehow, though, as a society we choose to believe that when it comes to government revenue and spending, those rules don’t apply. Silly Americans, why do we do that?
This post is featured in the Carnival of Personal Finance - Financial Armageddon Edition! at Master Your Card. Please drop by over there to for some other great posts.
