Category Archives: tax related issues

the cost of our system

Who pays taxes & who should

Who pays taxes & who should

I admit that I am a bit addicted to the National Debt Clock. While the growth of our debt is alarming and our unwillingness to manage it unconscionable, that web page carries quite a bit of useful information. Anyone can access that information at: https://www.usdebtclock.org/

Before I get to that it is also alarming to know that the currently stands at over $22 trillion and is on target to add over another $trillion in the next 12 months. Putting that into perspective the taxpayers’ average potion of this debt is over $180,000!

What this page contains that pertains to this post is a general breakdown of the sources of the tax revenues: 51% comes from taxes reported on personal tax forms, 35% from payroll taxes. 7% from Companies & 7% from misc. other sources. What is interesting to me is that only 7% is being paid by companies. Prior to the recent tax code change the company portion stood at 9%. While there are those that were appalled by that redistribution of income I am not. I will not repeat what is contained in an earlier post which contends that our economy would benefit in the extreme if there were no corporate taxes, since in the long term all costs eventually are reflected in consumer pricing and become, in effect, a regressive tax.

I am much more concerned with the impact of taxation on the middle class. There are numerous financial definitions of income to describe the middle class. In 2013, Congress quoted its own definition of a middle-class income during the fiscal cliff compromise. It said the middle class is anyone making less $400,000 or couples making less than $450,000. This seems too high for me and does not define a range (no lower boundary). I prefer to be a bit more conservative and will use the range of $30,000 to $300,000 annual family income as a definition.

Family incomes above $300,000 represent only 1% of the population. Family incomes below $30,000 represent 50% of the population. By this definition the middle class represents about 49%. Also using this definition, the middle class (the primary consuming class) bears 63% of the tax burden. My contention is the middle class should be paying no more than their fair share (no more than 49%) and the rich should be paying the amount required to make up for the lack of lower and below poverty families to pay tax (currently at about 4%). This bottom group struggles just to survive.

Again, I will not regurgitate how to achieve this since my approach is contained in previous posts.

One more comment related to companies. I do not think that dividends (the reward for capital investment) should be taxed. We should encourage capital investment!

Hidden taxes

Hidden taxes

We all aware of obvious of “upfront” taxes like sales, income, real estate, personal property and petrol taxes. What we many of us do not recognize are what I term “hidden” taxes. In a free market economy (a good thing) prices will adjust according to supply and demand and other market factors. In a competitive environment prices will tend to fluctuate. One example of a “hidden tax” is corporate income tax. Initially this appears as a good thing since companies make a lot of money and they should contribute to the running of the government. However, over time, much of this tax will be passed along to the consumer in pricing. So, who is paying the tax?                                                                                                                                                  My favorite “hidden tax” has to do with the cost of healthcare. Your elected representatives refuse to reduce this tax burden on you and this burden is much greater than the money you pay each year in income tax! Our current system for delivering healthcare is 2 ½ times the average of the EU countries and our overall quality of care is inferior.

“According to the IRS, Americans filed more than 150.6 million tax returns in 2015. During that year they also earned $10.17 trillion in adjusted gross income and had a total tax liability of $1.45 trillion. Some quick division means that the average gross income per return was $67,564 while the average federal tax hit was $9,655. That gives the average American family a federal tax rate of 14.3%.

However, the above figures above can be a bit misleading. Many low-income Americans actually have a negative federal tax bill thanks to the Earned Income Tax Credit. If you remove those returns from the equation then you are left with 99 million Americans who recorded an average federal tax hit of $14,654.” https://www.fool.com/taxes/2017/03/14/how-much-does-the-average-american-pay-in-taxes.aspx

The bottom line is that in 2015 the tax burden on families was $1.45 trillion while we spent $3.2 trillion on healthcare. Cutting this cost in half (which is possible) would more than cover our tax bill!

You ask why our costs are so high? There are several prior posts to this blog which detail the specifics, but to summarize it has to do which the many special interests that are profiting from the massive healthcare industry: Insurance administration & profits, obesity, RX companies (manufacturers & distributors), physician compensation, outrageous hospital charges and litigation.

This issue cannot be resolved by tweaking our broken system. We need to have the courage to admit that there are more effective system models out there and we should look at adopting the best features of systems that are effective and also provide a higher level of care. The only obstacle will be the special interests that are profiting for this massive “hidden tax” and their political influence is massive.

When is a tax increase not?

When is a tax increase not?

Keeping in mind, from the prior weeks post, that borrowing money to decrease taxes does not always result in a financial benefit the opposite can also be true. If the increase in tax is used to lower the deficit, or even better create a surplus, this accrues to the financial benefit of the tax payer. Thinking about your family unit it is akin to making a payment on a loan which reduces debt and also the amount of interest.                                                                                      A good example of this was the tax increase that was put into place by President George HW Bush. Keep in mind that as a Republican this action was political suicide. Not only did it set the table for his failed bid for re-election, it also created a significant split in his party. So why did he take this unpopular action? The simple answer is that it was in the best interest of the American people.                                                                                                                                             The economy was suffering and the national debt was rising. The action taken by President Bush initiated economic recovery and started the trend toward reducing the deficit. The unfortunate political outcome was that the results bore fruit during the tenure of President Clinton. The downward trend in deficit actually resulted in several years of surplus and a financial benefit to taxpayers.

                                     FY       Deficit   Increase in Debt   Deficit/GPD      Significant events

1991 $269 $432   4.3% Recession.
1992 $290 $399   4.4%  
1993 $255 $347   3.7% Clinton signed Balanced Budget Act.
1994 $203 $281   2.8% First Clinton budget.
1995 $164 $281   2.1%  
1996 $107 $251   1.3% Welfare reform.
1997 $22 $188   0.3%  
1998 ($69) $113  (0.8%) LTCM crisis.
1999 ($126) $130  (1.3%) Glass-Steagall repealed.
2000 ($236) $18  (2.3%) Surplus.
2001 ($128) $133  (1.2%) 9/11 attacks. EGTRRA.