Mr. Frugality: Taxes

Originally I wanted to write an article about how the current US tax system is unfair.

Let’s start with a look at the current income tax system. The government will tax you based on your income level. This percentage varies from 15% to 35%. Taxes are used to pay for bills that are passed into law; to maintain roads, police, military, etc. Without taxes, we cannot have the roads we have, the protections we receive, etc. That is discussing taxes in a general context- income tax is separate from state taxes.

That is about as simple as it gets. The current system is long, controversial, and incredibly complicated and is full of loopholes. When it is said the government taxes you based on your income, you are placed into a tax bracket. The tax bracket looks like the following:

2011 Tax Brackets

Yearly Income Bracket
$0 to $8,500 10%
$8500-$34,500 15%
$34,500-$83,600 25%
$83,600-$174,400 28%
$174,400-$379,150 33%
$379,150 up 35%

My problem with the system lies right here. It’s not the fact that those that make more money are paying more in taxes. My problem is that those that make more money are paying a HIGHER PERCENTAGE of their income to taxes because “they can afford it”.

If we are to have a balanced tax system, how can we call the current system “fair”?

Flat Tax Rate

A flat tax rate assumes that everyone pays the same percentage. A general flat tax advocates that everyone pay the same amount out in taxes. I am not advocating the latter; I am advocating for a flat tax rate, so that:

Yearly Income Bracket
$0 to $8,500 18%
$8500-$34,500 18%
$34,500-$83,600 18%
$83,600-$174,400 18%
$174,400-$379,150 18%
$379,150 up 18%

In this scenario, everyone is paying 18% of their income to taxes. Some will argue that this puts a burden on the poor, however I do not believe this justifies unfairly taxing a section of the bracket.


Yearly Income Average Income Tax Rate Paid
$0 to $8,500 $ 4,250.00 0.18 $ 765.00
$8500-$34,500 $ 21,500.00 0.18 $ 3,870.00
$34,500-$83,600 $ 24,550.00 0.18 $ 4,419.00
$83,600-$174,400 $ 129,000.00 0.18 $ 23,220.00
$174,400-$379,150 $ 276,775.00 0.18 $ 49,819.50
$379,150 up $ 379,150.00 0.18 $ 68,247.00

So, if the rate is at a constant 18% for everybody, we can see that the major company at the end of the bracket is paying $68,000+ in taxes, while junior out of college is paying $765 in taxes at the other end. The point? They both paid the same rate. Some republicans will disagree with a flat rate and argue that Everyone should pay a flat “$1000” for example from all tax brackets. That is too libertarian for me, and will produce very little net income for the government.


Paid (New System) Paid (Old System)
$ 765.00 $ 425.00
$ 3,870.00 $ 3,225.00
$ 4,419.00 $ 6,137.50
$ 23,220.00 $ 36,120.00
$ 49,819.50 $ 91,335.75
$ 68,247.00 $ 132,702.50

As you can see, the old system will favor the lower end of the bracket and punish the upper bracket. This inverse relationship, it is argued, spurs growth and generates revenue. Our problem now is that even though we have this flawed system in place, at current levels, it isn’t enough to pay for our debts. Even worse, the baby boomers are retiring, creating a loss in the workforce, and a loss of revenue for the government.

The flat tax encourages wealth at higher levels. At the same time, I realize that an argument against the flat tax is just as valid as the argument against the current system. The flat tax is a system, not a person, and ignores life’s moments, its quips and unexpected events.
I will always hold the opinion that even though taxes are harder on the lower end of the bracket due to their constraints, the following statements hold true to me:

*It is not fair to expect the upper tax bracket to “pay their fair share” and raise taxes on them while not raising the entire system.

*It is not fair to have a burden on the lower half, either. Perhaps programs can be created to alleviate some of the pressure?

*It is fair to say that a flat tax may not pay for as much as the current system will. Say:

New System Old System
$ 150,340.50 $ 269,945.75

I arrived at those numbers assuming that I added up each bracket from the above chart, with the old and new systems. You can see that the new flat tax will not generate as much revenue as the current system. People will argue that the new system would be bad and unsustainable. In fact, it is our spending that is unsustainable, and the new system, if implemented correctly, will put money back into the pockets of Americans who will have an easier time investing in their future. The problem is spending, not revenue. We can say that because although the old system is currently in place, it cannot pay for our debts.
Assuming state taxes work in a similar bracket fashion, those should be redone as well. States will do it their own ways, and if the federal government tries to insinuate how to complete state taxes, states will have a freaking cow about it.

I have no opinions regarding a flat sales tax. I think the sales tax, to my knowledge, is fair.

A Compromise Between Systems
There is a compromise, I believe, to the new and the old systems. Let’s look at the percent change between brackets in the old system:
 
Tax Bracket Percent Change
10% 0%
15% 5%
25% 10%
28% 3%
33% 5%
35% 2%

Once you hit the 25% tax bracket (you start making over $34,500 a year) taxes immediately shoot up a percentage change of 10%. From there on the changes are minor, until you get to the 33% bracket. If you labeled each tax bracket a tier, 1,2,3,4,5,6, according to the above chart respectively, Tier 1-2 would be the lower class, Tier 3-4 would be the middle class, and Tier 5-6 would be the upper class.

The percent change increase could be due to the amount of people in each tier. Obviously the population is disproportionate to the tax brackets: there are not 170 million Americans evenly distributed around the tax bracket. If we are going to at least make this fair on the middle class, we can cut their bracket to keep a constant percent change of 5%. The upper class, as I realize, will not like this. Such as:

Tax Bracket Percent Change
10% 0%
15% 5%
20% 5%
25% 5%
30% 5%
35% 5%

Upper bracket taxes will not change much, but the upper class would definitely have the right to complain. We all do. I am also a fan of tax cuts. HOWEVER, when you cut taxes, you need to cut them for everybody. To be fair, you need to cut them the same percentages. I fully realize, that with the amount of money involved, it is disproportionate to everybody’s life situations, but it is not discriminate against their income:


Tax Bracket Decrease to:
10% 8%
15% 13%
20% 18%
25% 23%
30% 28%
35% 33%

When you have that growth and a new tax system, if you can lower taxes and maintain the budget (REMEMBER GOVT: WE ARE HERE TO SERVE THE NEEDS OF THE PEOPLE, AND YOU ARE NOT A BUSINESS), you will keep the people happier, and spur growth, because America has more money in its pockets.

The current system may allow for an easier burden, but it is fully discriminating against everyone’s incomes. Supply and demand ladies and gentleman. It is my belief that the fair taxation of the people of this nation should not discriminate based on personal circumstances. I realize that, when you make over $100,000 a year and another person makes $10,000 a year, that a loaf of bread still costs the same. Opportunity, growth and higher wages (and a flat tax system) will result in a happier country, in my opinion.