Tax Fairness.
All Americans believe that everyone should pay their fair share of taxes. However that bromide is as useless as it is specific.
The word “fair” is one of those useful, all-too-common, words in politics and debate that mean nothing objectively but permit the speaker and listener to fill in what ever meaning they choose with the assumption that their interpretation is universally shared. For taxation what is “fair?”
Fixed, Flat, or Progressive?
Fixed Amount Taxation. If government was like any other service or product that we pay for - our taxes would be a fixed amount per person (or family) regardless of income. We pay the same amount for a hamburger at McDonalds regardless of our need or income - so why isn’t government the same way? For some government taxes we do pay the same amount. National Park Entry Fees, drivers license fees, parking meters or fines, certain fees on telephone service, and hunting and fishing fees. Having everyone pay the same amount is a form of fairness, but it is unlikely we would adopt that sort of plan for general taxation. In general - as you can see from the above examples - fixed rates tend to be charged for voluntarily engaging in certain activities or services.
Flat Rate Taxation. Another version of fairness focuses not on the actual amount, but rather the amounts relationship with the total wealth or income of the giver. The New Testament illustrates this eternal concept in Luke 21:1-4. “[1] As he looked up, Jesus saw the rich putting their gifts into the temple treasury. [2] He also saw a poor widow put in two very small copper coins. [3] “I tell you the truth,” he said, “this poor widow has put in more than all the others. [4] All these people gave their gifts out of their wealth; but she out of her poverty put in all she had to live on.”
Many state governments have a flat tax - a tax that charges the same percentage of income regardless of the amount. Property Taxes - generally - are also calculated a standard rate - charging the same percentage. Thus, although the rich man will pay a higher dollar amount than the poorer individual, the relative burden on each is the same - and therefore “fair.”
Progressive Rate Taxation. The word “progressive” can mean “forward thinking” or “innovative” but we are concerned with the second definition which means “accelerating, or escalating.” Under Progressive income taxation lower levels of income are taxed at a greatly reduced - often at a 0% rate while the percentage rate increases as income rises. Advocates of the progressive tax rate system argue that this is “fair” for two reasons: (1) Poorer individuals must use a greater portion of their income for basic necessities such as food, clothing, and shelter. Thus the “impact” on a poorer person of a flat rate tax disproportionately undermines his or her ability to meet basic needs. (2) Wealthier individuals, they argue, have received a greater “benefit” from our system of government and therefore are able (and should) bear a higher percentage tax rate.
Our current federal income tax system is based upon a progressive marginal tax structure. Wealthier individual pay a higher percentage of tax on ordinary income than do poorer individuals. (We’ll talk later about the different types of income later.) We accomplish this two ways using deductions and marginal tax rates.
Deductions. Out current system allows people to reduce their taxable income for certain expenses as well a “standard” deduction just for the cost of living.
For example, 2013, a single taxpayer can “deduct” $6,100.00 from his income for the “standard deduction.” This means that a single person earning $24,000.00 will only be taxed upon $17,900.00 of income. This is called his or her “taxable income.”
Certain expenses can be deducted. For example if you give to charity - you can deduct what you give from your taxable income. The interest you pay on a home mortgage can also be deducted. We give deductions for two reasons: (1) To avoid taxing people on the income they must use for cost of basic necessities of life, and (2) Encouraging certain activities such as giving to charity and home ownership.
Marginal Tax Rates. Our current federal income tax system does not charge a higher percentage rate against all income of higher wage earners - rather we use a marginal tax rate system. THis means that the first dollars earned are taxed at one rate, and then later earnings above those first dollars are taxed at a higher rate.
As a result of the Budget deal between President Obama and the GOP-controlled house - there are now seven marginal tax rate brackets:|
Rate
|
Single Filers
|
Married Joint Filers
|
Head of Household Filers
|
|
10%
|
$0 to $8,925
|
$0 to $17,850
|
$0 to $12,750
|
|
15%
|
$8,925 to $36,250
|
$17,850 to $72,500
|
$12,750 to $48,600
|
|
25%
|
$36,250 to $87,850
|
$72,500 to $146,400
|
$48,600 to $125,450
|
|
28%
|
$87,850 to $183,250
|
$146,400 to $223,050
|
$125,450 to $203,150
|
|
33%
|
$183,250 to $398,350
|
$223,050 to $398,350
|
$203,150 to $398,350
|
|
35%
|
$398,350 to $400,000
|
$398,350 to $450,000
|
$398,350 to $425,000
|
|
39.6%
|
$400,000 and up
|
$450,000 and up
|
$425,000 and up
|
So for single filers - the Federal Government will charge 10 cents tax on the first dollar of taxable income, and 39.6 cents of tax on every dollar earned after the first four hundred thousand.
SUMMARY:
While everyone talks about tax fairness - fairness is a highly subjective term - meaning different things to different people. We have three types of tax distribution: fixed amounts, flat rates, and progressive rates. You can also see that many words and phrases have very specific meanings. “Taxable income” doesn’t mean all income - just that income that is subject to taxation. When discussing taxes it is critical to keep these distinctions in mind.
No comments:
Post a Comment