Are income taxes too low?


On a recent flight, I was thinking about the inscription on the Internal Revenue Service building in Washington:

“Taxes are what we pay for a civilized society.”

I remembered it because there seems to be a lot less civilization going on these days in the USA. If you pay any attention to the constant stream of stories about people misbehaving on airplanes or going crazy at restaurants and bars, we Americans have become an uncivil bunch.

Seriously.

Need I mention the shouting match the Internet has become? Or that our elected officials all seem to be taking their etiquette lessons from World Wrestling Entertainment? And what is it that has made actors on streaming video series unable to speak a single line without a four-letter expletive about a very popular sex act essential for human reproduction? (If you’re skeptical, check out the new season of Goliath on Amazon Prime.)

It gives me an odd thought. Maybe we need higher taxes. Clearly, our current level of taxation isn’t enough to produce a “civilized society.”

I know you think I’m joking.

Well, maybe, maybe not. There has to be something that would deter us from becoming a nation of aggressive, in-your-face dolts. It’s certainly something we should be talking about rather than making the knee-jerk assumption that we are all horribly burdened with taxes.

To find some perspective on what we pay in federal income taxes, I used two websites, the Smart Assets tax calculator and the DQYDJ salary distribution calculator, to (1) calculate the effective tax rate on different levels of income and (2) see where each level of income stood, ranked as a percentile.

The results suggest, at least as far as the federal income tax is concerned, that our tax system is both reasonable and graduated for those who actually work for a living.

Witness:

  • The lowest earners pay no income taxes.
  • Workers with incomes around the median pay (about $50,000) have an effective tax rate of under 10%.
  • Workers in the top 1% (over $321,000 a year) pay an effective rate of at least 25%.

Also striking is how fast the income air gets really thin:

  • An income of $12,400 allows you to pay no income tax. But it also means you are in the bottom 5% of all earners.
  • By $30,000 of earned income, you’re up to the 26th percentile and paying an effective tax rate of 6.38%.
  • Go a bit higher and you’re up to the 52nd percentile with an income of $50,000, paying an effective tax rate of 8.63%.
  • At $75,000 in earnings you’re doing better than 73% of all earners and your effective tax rate is 12.75%.
  • Your income has to exceed $100,000 a year before your effective tax rate exceeds 15%, the preferred rate on capital gains and dividend income. At that level of income, you’re earning more than 85% of all workers.
  • Even at $400,000, an income that puts you well into the top 1% of earners, your effective tax rate is no more than 27.61%.

These figures don’t suggest a crushing burden to me. Indeed, when I pick up my completed tax return every year, the only burden I feel is the incredible thickness and weight necessary to report an uncomplicated but very adequate income.

The problem here is that while earned income is taxed on a reasonable and graduated basis, all the other sources of income aren’t. So the opportunity to increase civilized society by increasing taxes will have to come from other sources of income.

Yes, there are other sources. They are rare for most people but substantial for the folks who have most of the assets. Here’s a short list of items that allow people with the greatest wealth to pay taxes at rates the less fortunate envy.

  • Capital gains get a soft touch with tax rates of 15% to 20%.
  • Qualified dividends don’t pay more than 15%.
  • Real estate — residential or investment — is a fabulous tax dodge since you can take cash out tax-free by borrowing.

Beyond that, we have the other way to pay lower taxes: cheat. Earlier this year, IRS chief Charles Rettig estimated that a stunning $1 trillion a year went uncollected through tax cheating. Most of the cheating, he said, was being done by wealthy individuals and corporations.

Sounds like providing the IRS with a bigger budget is a straight shot to a more civilized society.



Read More: Are income taxes too low?

2021-10-24 11:02:19

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