Understanding taxes (if that is possible?)

October 23, 2008 at 5:49 pm 3 comments

Unfortunately taxes are a necessary part of life. Generally speaking we don’t like paying them. But we do. Every year we file our income taxes – state & local, as well as pay city, county, social security, fica, etc. The list is exhaustive. Our current tax plan but into place under President Bush is set to expire soon so whatever the new President puts into place will affect us all greatly.

First I would like to point out that when talking about the current budget deficit critics are quick to blame the Bush tax cuts for the so-called wealthy for the deficit. In reality this is not the case. Revenue is the highest it has ever been. The cuts on capital gains taxes has brought dramatic increases in federal revenue. Truly. The increase in the deficit has to do with being in a war and government spending having increased by over 30%. It is highly inaccurate to blame the tax cuts for this situation.

Both plans have plenty in them to make you question what is the better choice. As well, there are exhaustive views and commentaries to support whichever view you support. On paper they seem to not have that much of a difference in the overall economic picture, as mentioned in the clip below.

From – How McCain and Obama will change your tax bill.

Under both plans, all American taxpayers could pay a price for their tax cuts: a bigger deficit. The Tax Policy Center estimates that over 10 years, McCain’s tax proposals could increase the national debt by as much as $4.5 trillion with interest, while Obama’s could add as much as $3.3 trillion.

The reason: neither plan would raise the amount of revenue expected under current tax policy – which assumes all the 2001 and 2003 tax cuts expire by 2011. And neither plan would raise enough to cover expected government costs during those 10 years.

“Distributionally, they’re markedly different. But in terms of their impact on revenue, the two plans are not terribly different,” said Roberton Williams, principal research associate at the Tax Policy Center and the former deputy assistant director for tax analysis at the Congressional Budget Office.

The differences come from how they are put into place and what the ramifications of each would entail.

So here it is:

McCain-

  • Keep Tax Rates Low
  • Cut corporate tax rate from 35% to 25%
  • Allow First-Year Deduction, Or “Expensing”, Of Equipment And Technology Investments
  • Establish permanent tax credit equal to 10% of wages spent on R&D
  • Ban Internet Taxes
  • Ban Cell-phone Taxes
  • His most radical adjustment to the tax system which is not being mentioned as much in the tax portion is his health care credit. – “Transforming The Tax Code To Create Greater Equity: The McCain plan transforms the current tax code to provide all American families – including the self-employed and the uninsured – the same tax benefit, a $5,000 refundable tax credit ($2,500 for individuals) that was previously only available to those with employer coverage. Families can use this credit to purchase insurance of their choice, including keeping their current coverage.”
  • As well by not raising capital gains taxes the wealthy will continue to invest at a time when it is most needed to help our economy. If those taxes are raised the level of investment WILL drop.

Douglas Holtz-Eakin, senior economic adviser to McCain, notes that many reports does not take into account the spending reforms – such as eliminating earmarks – that are central to McCain’s strategy to support tax relief and help reduce the deficit.

Overall, we would all continue to do well under this plan.

Obama

  • Cut taxes for 95 percent of workers and their families with a tax cut of $500 for workers or $1,000 for working couples.
  • Provide generous tax cuts for low- and middle-income seniors, homeowners, the uninsured, and families sending a child to college or looking to save and accumulate wealth.
  • Eliminate capital gains taxes for small businesses, cut corporate taxes for firms that invest and create jobs in the United States, and provide tax credits to reduce the cost of health care and to reward investments in innovation.
  • Dramatically simplify taxes by consolidating existing tax credits, eliminating the need for millions of senior citizens to file tax forms, and enabling as many as 40 million middle-class Americans to do their own taxes in less than five minutes without an accountant.

Obama proposes a radical change in the tax system to cut taxes to the bottom “95%” of wage earners. Unfortunately this has major implications as well. It sounds good but there is much more to it. 50% of wage earners do not even pay taxes. So while what he says may be technically factual . . . the plan increases the number of welfare recipients, and extends the poverty trap of poor households.

    What it really means is that he is reintroducing a massive increase in the welfare state, costing about $30 billion per year. According to the Center for Data Analysis’ micro-simulation modeling, Obama would increase the number of tax filers who receive a check from government without paying any taxes, including payroll taxes — people filing just to receive a welfare check — by about 10 million. Where will the $30 billion per year come from? From those who are paying taxes, of course. And indirectly from all of us, when the economy is dragged down by higher tax rates on businesses. – from The FoundryBut it does not stop there, raising business taxes, national health care, etc. There are many facets to this plan that will have a trickle down effect. While taxes may go down for the lower income families, companies that are also hit by tax increases will raise prices, lower salary, cut back on jobs which in turn will all effect the very same people that Obama is out to help.

    Another good article on Obama’s 95% tax plan

To the surprise of some, even though Senator Obama’s tax plan lowers taxes for the bottom four quintiles, marginal tax rates would fall only for the very lowest-income couples. Taking both income and payroll taxes into account, those at the very bottom of the income distribution would see their effective marginal tax rates fall from 27.4 percent to minus 58.6 percent due to proposed changes to the earned income tax credit and Senator Obama’s new “Making Work Pay” credit.

Most low- and moderate-income couples would see their effective marginal tax rates rise, in some cases, significantly. Indeed, some low- and moderate-income taxpayers will see their marginal rates rise to more than 50 percent.

High-income taxpayers can also expect their effective marginal tax rates to rise—to 47.2 percent-under Senator Obama’s tax plan. This increase is caused by rolling back the 2001 and 2003 reductions in the top two tax rates, curtailing deductions and exemptions at high income levels, and potentially raising Social Security taxes. – The Tax Foundation

    Now some commentary:Aside from the overall theory of wealth redistribution, which some may relate to socialist types of theory, that does not help the economy in the long run. There should never be total equality in income. The neurosurgeon and the fast-food worker should not have the same salary. There has always been brackets, or castes if you want to call it that. Equality as a person is not equated to equality in income or possessions. All people are created equal, but it pretty much stops there. We all have different aptitudes and abilities and will work where we are best suited. The driven individual will work hard to become successful and then will be told, “Hey, we need your money to help Tom, he does not have as much as you and you have to share it with him.” That is wealth redistribution. I should not HAVE to give money I work for to someone else because they are not making as much as I am. It does not work.

    The definition of “wealthy” to be $250,000 does not allow for areas in our country where while that sounds like an amazing annual income, it is not. California and New York are two prime examples. This article explains it well, better than I can.  – Tax Rates for New Yorkers would top 50% under Obama.

    I was talking to someone yesterday who has valid fear of losing his home under the Obama tax plan since he does make $250 in one of those states. He has a family of five and is scared that he will not be able to afford the mortgage he saved for years just to get. As well I spoke to a mother who has lived in a socialist country and said she does not want to go there either, giving examples of the lack of incentive to the worker because they don’t care anymore. While it sounds good to the supposed 95% of the country the other five pump money into the economy to keep it moving, fund most of the governments revenue already, and are the most positioned to give generously.

    I am in favor of encouraging and rewarding people to work hard. To earn what they have. Not to blindly give more to them to try and make things more. While a plan might sound good on the surface it deserves to be looked into further to see what the actual ramifications and implications are to all citizens. If we are being fair and equitable, you will remember that that upper five percent helps keep our economy and businesses running. Personally I am a fan of the Fair Tax plan. I hope that one day it comes around as a possibility again.

    Look closely at the lines for $111,000 – $226,000 – According to those estimates you will actually fare better under the McCain plan. Curious.

    A final thought -

    Tax studies have shown that when tax cuts are deficit funded and they’re paid for by raising taxes in the future, “the economy is worse off than if you didn’t cut at all,” Burman said.

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At least he knows. Why can’t we all just get along?

3 Comments Add your own

  • [...] Understanding taxes (if that is possible?) “Transforming The Tax Code To Create Greater Equity: The McCain plan transforms the current tax code to provide all American families – including the self-employed and the uninsured – the same tax benefit, a $5000 refundable tax credit … [...]

  • 2. Understanding taxes (if that is possible?) : thegameoflove  |  October 23, 2008 at 6:28 pm

    [...] Every year we file our income taxes – state & local, as well as pay city, county, social security, fica, etc. The list is exhaustive. Understanding taxes (if that is possible?) [...]

  • 3. Willie  |  October 24, 2008 at 5:45 am

    Even though I’ve try, but still understanding tax is really hard for me.

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