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Taxes, Damn Taxes and Lies

It is tax season and that mean politicians have to make comments on taxes and how they affect the American public.  Unfortunately for the public most of the politicians making comments don’t really understand how taxes work and make their comments with one intent:  Scoring political points.

Let’s look at a few examples of some of those comments:

Kamala-Harris-hands-Nick-Ut-Associated-Press-640x480

Sen. Kamala was quick to jump into the fray.  Since she is running for President she has to burnish her credentials.  “The average tax refund is down about $170 compared to last year. Let’s call the president’s tax cut what it is: a middle-class tax hike to line the pockets of already wealthy corporations and the 1 percent.”

Nancy Pelosi, Speak of the House, Democrat,

Speaker Pelosi was next in line and after reading the headline about tax refunds had this to say:  Once again, American families are feeling the reality behind the empty promises of the GOP Tax Scam”

This list could go on and on and everyone reading this type of statements should turn and away and laugh.  Refunds have nothing to do with actual taxes.  This year I am moving from being a salaried employee to one that will get a 1099 from the firm.  That means I have to pay my taxes quarterly instead of having them withheld by the firm.  Since I have other taxable income, I have to decide how much of my earned income that I want to pay each quarter to ensure that I cover the taxes that I owe.  My accountant asked me a basic question.  Do you want to break even, or do you want to get a refund at the end of the year?  Being like most Americans I said I wanted a refund.  That means I will pay more each quarter, but I will have the peace of mind knowing that I will not owe the IRS when I file my taxes for 2019 and I will get that “bonus” check next spring.

If some of these glib politicians would take the time to actually understand how the tax system works, they might think twice about making statements that make them look foolish to those that do understand the system.  But they are banking on the knowledge that the average American does not understand the how taxes work and will become angry when they read those statements.

Some of the facts were pointed out by the nonpartisan Tax Policy Center.  They estimated that the middle quintile of earners would see a 1.6% after-tax income increase and an average tax cut of $930.  They also pointed out that some middle-income earners will actually see a tax increase because of the elimination of some of the tax credits and particularly some of the deductions.  Specifically, those that live in high tax states will see their taxes go up slightly because of the cap on the State and Local Tax (SALT) deduction.  But I would caveat this with the projection made by the Joint Tax Committee in the Congress that about 88% of the households filing taxes will use the standard deduction instead of itemizing.  The only people that will be affected by the loss of the SALT deduction will be those that itemize and have high state and property taxes.  The next time you hear Senator Schumer demanding that the wealthy pay more in taxes someone should ask him why he objects to the wealthy in New York complaining about the loss of this deduction because only the high-income people itemizing will be affected by the loss of the deduction.  You see, Senator Schumer is all for people with higher incomes paying more in taxes, just not his constituents.

While we are on taxes why not look at some of the other ludicrous statements that some of our more naïve politicians make.   The most vocal in all of this has been the constantly entertaining bartender from the Bronx, Congresswoman Alexandria Ocasio-Cortez (AOC).  She has offered up the suggestion that we should raise the top marginal rates to 90% and cites that fact that they were that high in the 1950’s as proof that this would be fair today.  But once again she shows an utter lack of understanding of how the tax code really works.  Marginal rates (the top marginal rate is now 37%) are only points of reference and do not tell you anything about your real tax burden.  Bernie Sanders and Elizabeth Warren are two others that are calling for a significantly higher top marginal rate and Sanders once said that people earning $200,000 in the 1950’s faced a top marginal rate of 91%.  That would be about $2,000,000 today.

The real number that any tax expert knows is critical is the effective tax rate.  In the 1950’s the effective tax rate for these people was 16.9%.  That means that percentage of their total income that went to the federal tax man was 16.9%.  Today we have simplified the tax code and have far fewer brackets than we used to have which means the money in each bracket was taxed at that level and not the top level.  We have also eliminated most of the deductions and tax shelters that existed years ago.

To better understand this let me try to explain this in a paragraph:

The federal income tax system is progressive, meaning that it imposes a higher average tax rate on higher-income people than on lower-income people. It achieves this by applying higher marginal tax rates to higher levels of income. For example, starting in 2018, the first portion of any taxpayer’s taxable income is taxed at a 10 percent rate, the next portion is taxed at a 12 percent rate, and so on, up to a top marginal rate of 37 percent.

The next table shows what the tax bracket are for married couples filing jointly, the largest quadrant of tax filings.

For married couples filing jointly:

Marginal Tax Rate Taxable Income Range If Your Income Falls Within This Range, Your Tax Is…
10% $0- $19,050 10% of your taxable income
12% $19,050-$77,400 $1,905 + 12% of the amount over $19,050
22% $77,400-$165,000 $8,907 + 22% of the amount over $77,400
24% $165,000-$315,000 $28,179 + 24% of the amount over $165,000
32% $315,000-$400,000 $64,179 + 32% of the amount over $315,000
35% $400,000-$600,000 $91,379 + 35% of the amount over $400,000
37% Over $600,000 $161,379 + 37% of the amount over $600,000

DATA SOURCE: IRS.

The key word here is taxable income which is after all legal deductions.  That brings us to the important fact for all of us. What is our effective tax rate or put more simply, what do we really pay in federal income taxes.  For the middle class the average effective tax rate is below 10%.  It is only when you start making over $200,000 that your effective rate starts to get close to 20%.  For really high earners that number can get close to 30%.  Those numbers are higher than they were in the 1950’s and 1980’s.  Those are facts, not political rhetoric.  And that my friends is what we should be looking at, facts.  The middle class got a tax break in the last tax bill and how much they get in a refund has nothing to do with how much they pay.  The top earners are still paying the bulk of the income taxes just as they were years ago and still are today.

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So, the next time you see some of these liberals pontificating on tax policy, especially Ms. Ocaiso-Cortez, you should ask yourself if they actually know what they are talking about or is she just hearing “cows farting in the field.”

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