from Jonna Ivin, “I Know Why Poor Whites Chant Trump, Trump, Trump,” STIR, Apr 1, 2016
Tag Archives: income inequality
by Lisa Longo, 2/9/15
“Tax cuts to the rich create jobs”. “Tax cuts for the working poor and middle class stimulate the economy”. Only one of these is true, and it is time to figure out which. And we can, using some basic math.
Is taxing the rich socialism? Is it “un-American” to ask the rich to pay more taxes? Or is income inequality at the root of our economic problem? And how can we know which is the “right” theory? On the one hand you have Democrats calling for an increase to the minimum wage, affordable health care for all and an increase in both the benefit and wage base of the Social Security system as a method of putting more money on “Main Street” to stimulate the economy. On the other side you have Republicans insisting we give more money to “Wall Street” and just saying no to everything until they get their way.
In order to decide who is really “right”, I decided to do some math. I find that when I can break an argument down to mathematical components it provides useful data to help me understand the issues better.
Here are some computations and assumptions for this problem:
An average family needs to make approximately $4,000 per month, net of taxes to cover all expenses. That comes to $23.08 per hour net, which is $27.69 gross for a base hourly wage if we assume average taxes paid equal 20%.
That is the minimum wage at which a person does not “need” any assistance to pay for living, insurance, food, transportation and health care. It does not include saving for retirement, vacations or other expenses that are “discretionary”, for example vacations, gifts, going out to dinner or the movies, buying clothes or getting your hair cut or nails done. And forget about getting sick and not being able to work, republicans don’t want paid sick leave either.
Now, let’s compare discretionary income and how taxes work, and how a tax cut or increase impacts different income levels:
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Robert Reich’s Blog (also see video there), April 15, 2014
It’s tax time again, April 15, when our minds turn toward paying the taxes we owe or possibly getting a tax refund. But what we don’t think about enough is whether our tax system is fair. The richest 1 percent of Americans are now getting the largest percent of total national income in almost a century. So you might think they’d pay a much higher tax rate than everyone else.
But you’d be wrong. Many millionaires pay a lower federal tax rate than many middle-class Americans.
Some don’t pay any federal taxes at all. That’s because they‘re allowed to deduct from their taxable income such things as large interest payments on mortgages for huge homes, also the costs of business entertainment and conferences (aka vacations at golf resorts), and gold plated health care plans.
Some also take advantage of tax loopholes that let them park some of their earnings in offshore tax havens like the Bahamas or the Netherlands Antilles.
And other loopholes that allow them to treat some income as capital gains – subject to a much lower tax rate than ordinary income. If you happen to be a hedge-fund or private-equity manager, there’s a capital gains loophole designed especially for you.
Consider the Social Security payroll tax and the situation is even more lopsided. That tax applies to every dollar of income up to a cap — which this year is $117,000. Anything earned above the cap is not subject to Social Security taxes at all – meaning anyone with a high income pays a much smaller percentage of it in Social Security taxes than most people do.
Put these all together and you see why Warren Buffet, the second richest person in America, pays a lower tax rate than his secretary, as he readily admits.
State and local taxes are even more regressive. The poorest fifth of Americans pay an average state and local tax rate of over 11 percent, while the richest fifth pay only 5.6 percent. This isn’t small change. State and local taxes account for about 40 percent of all government revenues.
Believe it or not, Republicans want to make all this worse by cutting taxes on the wealthy even more. Paul Ryan’s new budget doesn’t just slice Medicare, education, and food stamps. It also lowers the top federal tax rate to 25 percent.
When the rich are let off the hook in all these ways, the rest of America has to pay more in taxes to make up the difference – or have services cut because government doesn’t have the funds.