I had a friend in grad school who worked at a wine store where he was able to buy wine at one-third off the normal price and without paying California sales tax (then 8%). This, he concluded, gave him a 41.3% discount, and I was never able to convince him otherwise. He and Dennis Prager should take a class together:
Hewitt: Let’s cover this 23, 30% divide Dennis. If we can. If I want a dollar for a pencil at the end of the transaction, I make a pencil I want to have a dollar in my pocket, I’m going to have to charge $1.30 under the Fair Tax plan. Do you call that a 23% tax or a 30$ tax?
Prager: Ok. I have mulled this thing over, and over, and over, and I don’t know of much in life where truly the way one phrases the question gives you a different response. That’s one way of stating the statement. The other is I charge a dollar for a pencil and you pay me 23%, therefore you are in fact going to pay $1.23 for the pencil. That is 23%.
sal
I don’t get it. What is the math supposed to be in both examples?
Signed,
Ignorance on display
MikeJ
How much wood would Dennis Prager chuck if Dennis Prager weren’t a twit?
DougJ
Say the wine was usually a hundred dollars plus tax. My friend paid 66.70. The price with tax is 108 dollars. So his discount is $41.30, which is *not* 41.3% of 108 (it’s something like 38.3%).
In Prager’s example, the tax of 30% is on the normal price of the good. The 23% is the percentage on the normal price plus the 30%. Except that Prager botches this all so badly.
JGabriel
@sal:
I get roughly 38.27% for the first example.
For the second, I don’t know because I can’t tell what the fuck they’re talking about. They each have the same pre-tax price for the pencil (one buck), but a different post-tax price, which ain’t possible.
ETA: Oops, Doug got there first.
.
The Grand Panjandrum
Hey and if I buy 100 Powerball tickets I have significantly increased my chances of winning the jackpot … sigh … would anyone ever admit they couldn’t read and write without being forced to do so?
Wilson Heath
Well, you have to use the second way, because there’s no way to meet the revenue needs of the fisc at less than a 50% tax the first way. A 50% tax won’t sell. Mind you, the second way likely becomes a 50%+ tax once the economy goes into a free fall as a result of this idiocy.
This is a feature, not a bug. These men are anarchists. They want nothing short of the end of the modern economy. Different file but in the same drawer as the loons who want to eliminate the federal reserve and get us back on gold.
birthmarker
Here is a long article from Money Magazine discussing the controversy with Neil Boortz’ “Fair Tax” book. Boortz admits his math is fuzzy.
http://money.cnn.com/2005/09/06/pf/taxes/consumptiontax_0510/
I have no idea how to do these html tags, so we will see…
SpotWeld
Basscially the idea that the “Fair Tax” will be a blanket 23% is some sort of sweet spot of a number. The math must therefore be worked a bit to get make the numbers support that “truth”.
Did someone do market research and find that 23% will be a tax decrease for most Americans while 30% is a marginal increase?
Why has 23% been so locked in to the “Fair Tax” mantra?
khead
The best part is that it doesn’t matter to the folks they are talking to. The rubes don’t understand the difference between inclusive and exclusive tax rates anyway so they will just nod along in agreement and scream “23%!” because that’s what the Flat Tax Guy told them.
stinkwrinkle
@SpotWeld:
http://en.wikipedia.org/wiki/23_Enigma
The Grand Panjandrum
Speaking of the Fair Tax where the hell is Michael D?
khead
Yeah, heh, sorry ’bout that. Flat Tax. Fair Tax. Crap Tax. Boortz Tax. Whatever. I’m just tired of playing Whack-a-Mole with it every so often.
NonyNony
@SpotWeld:
I’d assume because they want to play on the confusion that people have over tax rates and percentages. Only two income tax brackets are lower than 23% right now, while there are 4 tax brackets lower than 30%. The folks who are going to rally behind a Fair Tax aren’t as likely to support it if the percentage is higher than their income tax bracket percentage because, well, people have a tendency to do straight comparisons of things like this. Since the bulk of the people we’re talking about who are big Fair Tax supporters are probably in the 20K-80K range (since most people are) you don’t want to flash a number around higher than 25% – the top bracket for that range.
Of course directly comparing a sales tax percentage and an income tax percentage is a stupid thing to do – income taxes are progressive while sales taxes are regressive and people who make less money are going to be more heavily taxed in a sales tax regime than they are in an income tax regime. But explaining why can be difficult when the response you get back is “23% is clearly less than 25%, so what’s the problem?” Which is what the con-artists behind the Fair Tax proposals are counting on.
Michael
It is the Big Rock Candy Mountain tax. The wingnut pimps for this bit of Texas based deliberate stupid have talked themselves into the delusion that:
1. It wouldn’t crash domestic consumption.
2. That it wouldn’t crush the export of American goods.
3. That the math is honest.
4. That regressivity and handing over more power to the pinnacle of the status quo are somehow positive.
The whole purpose of it is to allow the Confederacy (+Alaska, Wyoming and Idaho) to hold back tax money from the Feds, you betcha.
Montysano
Eh…. Prager should just stick to writing sex advice columns.
steve s
In my career as a math tutor, I see very many kids with the sort of confusion about percentages that Prager and Hewitt are demonstrating here. It’s very common in the bottom 50th percentile.
Michael D.
@The Grand Panjandrum: Wow. Someone has a long memory. I actually STILL support a national sales tax. I just wish they’d do a better job explaining the rate. And I have also resigned myself to the fact that it will never happen.
SpotWeld
Fnord
NonyNony
@Michael D.:
A national sales tax that eliminates and replaces income tax or a national sales tax that supplements the income tax? I could never support an attempt to replace the income tax with a sales tax – that’s just horrible policy. But a supplemental tax I could potentially get behind – especially if it were a “luxury tax” that wasn’t applied to food, clothing, first home purchases, first car purchases, and a few other basic needs.
Demo Woman
When the average American think of sales taxes, they base it on one. For example, in GA the sales tax rate is 7% so for every dollar I spend, I pay an extra 7 cents in taxes.
The fair tax folks want to look at it in reverse.
The other thing the fair tax folks don’t want to tell you is that the tax is on everything including services. If you think that a doctor’s visit is expensive now, just wait.
Punchy
And if my pencil costeded 1 penny to make, but I chargeded you 99 pennies, that’s like a 98% tax, or something.
math iz harduh
Zifnab
I never really got the obsession with the “Fair Tax”. I guess the idea is that you want to tax people on consumption because you want to place some incredible virtue in saving and investing. But, at the end of the day, who cares? 23% tax at the counter. 23% tax out of your paycheck. The country doesn’t suddenly need less money now that you’ve come up with a new tax scheme. Uncle Sam is going to have to take his pound of flesh to pay its trillion dollar budget one way or another.
This is ultimately all about justifying a shift of the tax burden. The only people honestly advocating this policy are people who believe (rightfully or wrongfully) that they are going to pay less. If they pay less, someone else gets to pay more. Its the same wealth redistribution conservatives love to complain about, just aimed at some population segment they approve of.
That, and tracking income is easy. Tracking sales is significantly more difficult. So, you’re replacing a system that is fairly fraud proof with a system that can be easily skirted by almost anyone.
Demo Woman
We used to have a progressive income tax, now not so much. Capital gains are taxed at 15% and the average rate that is paid by the top 1% had decreased by 10% over the last two decades.
A flat tax would be fair and progressive if they had a $50000 deductible for every taxpayer. You could sweeten the pot to allow an extra $25,000 for stay at home moms. Both earned and unearned income would be taxed the same.
It’s clear, concise, progressive and the top income earners would scream bloody murder. The rate would be below 25% though.
I should admit that I am a believer in a strong middle class and our tax system used to support this.
Sales taxes are regressive and hurt the lower and middle income the most.
Brick Oven Bill
Neolib Math:
The 36% income tax bracket brings in about $600 billion as best as I can tell. Raising this bracket from 36% to 39.6% would generate somewhere around $21.6 billion in new revenue, assuming people do not change their work habits.
$21.6 billion isn’t crap.
This is why these bastards raised the cigarette tax.
Seitz
Just in case sal doesn’t feel the question has been adequately answered….
Let’s go back to the pencil situation. Hewitt is selling a pencil, and at the end of the transaction, he wants a dollar in his pocket. He has to pay the government 23% of his total revenue from the transaction.
He can’t charge $1.23 for the pencil, because if he does, the government is going to get 23% of $1.23, which is actually about 28 cents, and he’s left with only 95 cents. In order to get his dollar at the end of the day, he has to charge $1.30. He gives 23% of that sale to the government, which is about 30 cents, and he’s left with the dollar that he wanted.
The problem is that no taxing jurisdiction in the country (45 states, plus D.C., and a crapload of local jurisdictions in Colorado, Arizona, Alabama, and Louisiana) calculate sales tax like this. They all give you a price for the good, then add tax on to that. If you walk into a store in New Jersey and buy a pencil for $1.00, they add 7% sales tax, and you pay $1.07. Everyone who has ever paid or collected sales tax considers the sales tax on that transaction to be 7%. National sales tax people would try to convince you that you really only paid 6.5% tax on that sale. They would do that because they are liars and are trying to confuse you.
Doug’s friend made the mistake by adding two percentages together, when in fact one percentage builds off the other. He saved 33% on the purchase price, didn’t pay 8% tax. He paid $66.67 for something that cost normal customers $108. He saved $41.33. 41.33 is 38.3% of 108, so his discount was effectively 38.3%.
jenniebee
You know, it’s really a sad day when you realize that, if Lyndon LaRouche was doing his schtick today, it would be indistinguishable from the wingnut background noise.
UPDATE: @Brick Oven Bill – see? case in point.
Evinfuilt
His spawn are still on my college campus working hard to recruit new people to replace them once they learn math.
Brick Oven Bill
jenniebee, honey, those are not a schtick, those are calculations.
$21.6 billion might be nice for you and me to, you know, get away. But it still isn’t crap.
Elizabelle
OT: yippee! So glad to be back reading BJuice. Was getting the dreaded Malware warning all yesterday afternoon/evening (had escaped it the previous day).
Disquieted to not be able to log on to my favorite polichat site.
But a visit to In N Out Burger soothed. Somewhat.
Malware stay gone.
Grumpy Code Monkey
What’s going to be fun is when people finance big-ticket items (like a car) and they realize they’re paying thousands of dollars in interest on just the tax amount. You think new car sales are in the shitter now, just wait until something like this passes (especially since it applies only to new purchases).
Not to mention 100% of the tax burden is going to be on the consumer.
Zifnab
@Brick Oven Bill:
What’s that? Two months in Iraq? Full funding for No Child Left Behind? The entire budget for the Department of Justice?
You know, a billion here and a billion there… pretty soon you’re talking about a lot of money.
http://img297.imageshack.us/img297/5927/wallstatsdatlarge.jpg
flukebucket
This is why these bastards raised the cigarette tax.
You tell ’em BOB. I am so god damn mad I can’t.
Suicidal Zebra
There isn’t quite as much intellectual dishonesty in quoting a ‘23% Tax Rate’ for FairTax as it seems at first blush. The Fair Tax idea is most often raised as an alternative to Income Tax, which is generally garnished straight from your gross wage (in the simplest example). When discussing Income Tax burden, most people complain that they’re paying a % of what they have incoming, i.e. ’40 cents on every dollar I earn goes straight to the government.’
Fair Tax’s 23% figure uses the same construction to compare like with like, i.e. ’23 cents on every dollar I spend goes straight to the government’. The issue is that Sales Taxes are almost invariably described the other way, which is where the 30% tax rate comes in. Both are correct, but you have to be extremely precise with your language and most proponents of the Tax are anything but precise.
Thank goodness Hewitt set Prager straight.
(that Fair Tax is barmy goes without saying, you have to go a long way to hear a policy founded on such idealistic principles (olol ditch the IRS!) and unenforceable implementation (Sales Tax, with income based exceptions!).
gbear
How come the magic number is always 23%?
Keith
@DougJ:
Wait, you’re trying to tell us that “conservatives” don’t understand the mathematics of finance? How could that be?!?
Brick Oven Bill
$21.6 billion is:
79 days in Iraq; or
The amount of new unfunded liability promises the government will make between now and this Sunday’s suppertime.
Adrienne
It matters. A LOT. 23% at the counter hits lower income ppl the hardest because chances are, they are going to use a higher percentage of their paycheck at the counter and so their effective tax rate will be pretty close to approaching 23% especially since the tax will be on EVERYTHING. However, higher income people will usually consume a lower percentage of their pay so their tax rate will be lower. Here’s a rudimentary example:
$30K income. Let’s assume that he consumes about 90% of his pay which is $27K and saves the other $3K. His effective tax rate will be 20.7%.
$100K income. Let’s assume that she consumes about 80% of her pay which is $80K (still a lot to live on for a single person) and saves the other $20K. Her effective tax rate is $18.4%.
Low income ppl who consume a larger percentage of their income (because they have no other choice) pay a higher percentage overall when taxed out at the counter. It’s fundamentally unfair.
This is also why I believe that over a certain amount or percentage of income, income from capital (cap gains) should be taxed at the same rate as the income tax. Rich ppl shouldn’t be able to choose their mode of compensation so that they can pay 15% while the rest of us pay 25% or something like that.
david1234
A 30% sales tax is equivelent to a 23% income tax (assuming all income is spent). To say or imply that it is a 23% sales tax is wrong.
Cris
@SpotWeld: Hey, I didn’t see any text in your comment.
Bootlegger
@Brick Oven Bill:
I know if I were forced to make $500 less per month out of my $20,000/month salary I would just quit and go Galt. No way am I working that hard just to have the Feds penalize me!
r€nato
more wingnut math:
My ex-father – an accomplished engineer! – used to repeatedly insist that he paid over 1/2 his income in taxes.
His method for arriving at this estimate:
He was in the top tax bracket (36%).
He paid 8% sales tax on his purchases. That’s 44% right there.
Then he added in gas taxes, property taxes, taxes on his phone bill and so on, and that pushed it over 50% tax burden.
I don’t even know where to begin with what’s wrong with this, but perhaps a good start would be to point out this is the same guy who, when dining out, figures a 20% tip TO THE PENNY.
(Did I mention he was an engineer?)
DanF
@Grumpy Code Monkey:
And then you add state and local sales tax to the purchase. Forget about paying someone to paint your house, mow your lawn, fix your roof, etc. All of that just got 30 to 40% more expensive.
Dennis-SGMM
@Grumpy Code Monkey:
Here in lovely LA County the sales tax rate is 9.75%. We voted ourselves an additional percent of sales tax to pay for public transportation. Add our state’s 1.19% registration fee and you can tack nearly 11% onto the price of that new car. And don’t try to duck that extra 1% by buying the car in another county. LA got the legislature to pass a bill mandating that LA County residents pay their county’s rate no matter where in CA they buy their car.
Any individual or couple filing jointly with over $47k/yr in income pays 9.3% state income tax.
Which is why it can make me slightly crazy when I hear someone say that Californians aren’t willing to pay for government services.
r€nato
@Seitz:
Percentages are notoriously difficult for all but the most numerate folks.
Proof: try asking the average person the following:
1) If you invest $100 in a stock and a year later it’s worth triple what you paid ($300), what percent increase in value is that?
2) Tweedledee gets 55% of the vote in an election. Tweedledum gets 45% of the vote. The headline in the newspaper the next day screams, “TWEEDLEDEE SWAMPS TWEEDLEDUM BY 10%” Is this headline correct?
…
1) 200%. Most will say 300%.
2) No. Tweedledee got 10 percentage points more votes; in terms of percentage itself, he got about 22.2% more votes than Tweedledum (55/45 = 1.222). Virtually every election story I have ever read in my entire life confuses ‘percent’ with ‘percentage points’ when comparing vote totals.
Lee
I’m not a big SalesTax supporter, but most (if not all) of your criticisms are forgetting the prebate which is a key portion of alleviating the burden on the lower income families.
Being in top tax bracket, my prefered taxing scheme is a flat tax. Taxing ALL income with the $X deduction across the board and NO other deductions. No deductions for your house, kids, depreciation of your business capital.
With the deductions you get essentially 2 tax brackets, zero and Y (the rate).
r€nato
@Lee:
flat tax is a naive pipe dream. Does anybody really believe that over time it would NOT be constantly amended to add exemptions and deductions for various groups/special interests???
William Dembski
“The 36% income tax bracket brings in about $600 billion as best as I can tell. Raising this bracket from 36% to 39.6% would generate somewhere around $21.6 billion in new revenue, assuming people do not change their work habits.”
You might want to checkity-check that math.
ZachPruckowski
A unbiased way to calculate the effect of a tax is “what does having this tax in place cost me”. Let’s look at a family making $80,000.00. They’re somewhere in the general neighborhood of the 75th percentile, meaning they’re better off than most, and probably upper-middle class. They’re likely dual-income. All I have is 2004 figures for income, but they’re almost certainly still “upper-middle class” under more recent figures. For the purposes of this discussion, we’ll ignore state taxes, local taxes, and Medicare/Social Security. “Pencils” is a proxy for any sold good.
At 2009 tax rates, they pay $9525.00 in income taxes^, giving them $70,475.00 in after-tax income. Let’s say they save 10% of that money**. They save $7,047.50, and buy 63,427.5 pencils at $1 each.
Under a Fair Tax, they take home $80,000. They pay no income tax. Let’s assume they spend this extra money instead of saving it. They save $7047.50, and buy 56,117.31 pencils at $1.30 each. They have 11.5% fewer “pencils”, meaning they are able to buy few goods/services. Their standard of living has declined as a result of this tax switch-up, as if you’d taken $7310.19 out of their pockets.
At $50,000 (basically the exact middle of middle-class), you pay $6455.00 in income taxes presently, save $4354.50, and buy 39,190.5 pencils. Under the “Fair Tax”, saving the same amount, you’d get 34,615.4 pencils. “Fair Tax” cuts your spending power by $4575.12.
At $150,000 (top 5%, rounded for math ease), you pay $27,058.00 in taxes, save $12,294.20, and buy 110,647.8 pencils. With Fair Tax and the same amount saved, you get 105,927.54 pencils, so Fair Tax still reduces your standard of living.
At $250,000 (the mythical middle-class Manhattanites), you pay $56,545.50 in taxes, save $19.345.45, and buy 174,109.05 pencils. Under the Fair Tax with the same amount saved, you get 177,426.58 pencils. At this point, the Fair Tax is a better deal for you, though only by about 2%.
I’m going to stop at $250,000, because above that level I’m not really sure how to model the savings rate.
^ – Using standard deduction. Make sure you’re applying the tax rates marginally before you argue with this number.
** – This is higher than current rates, and higher than recent rates, but a higher savings rate benefits “Fair Tax” proponents, so we’ll roll with it.
EDIT: I forgot to model the personal exemption as well as the standard deduction. So my model is more favorable to Fair Tax than it should be.
Bubblegum Tate
@gbear:
Maybe that’s the real mystery of this movie. Jim Carrey: Flat tax fanatic.
Zifnab
@Lee:
The prebate is a problem in and of itself. You’ve now got the government doing, what? Paying people up front for earned income that they spend down the line? It’s totally backwards and ripe for exploitation.
The income tax system has been functioning with increasing success since 1917. Why are we suggesting we turn the whole system on its ear just to satisfy nebulous ideological purity tests?
Lee
Never said it would actually happen, it is just my prefered scheme.
What I think will actually happen is…nothing. More deductions, more tinkering with the various tax rates, more money I have to spend to pay less taxes.
Lee
Back when I got refunds (figured out the error of my ways and now send money every year) I got the check like clockwork. Back when we got those surplus checks (or whatever they were) everyone seemed to have gotten them just fine. The CURRENT system is not ripe for exploitation? LOL I love to show you how every year I am paying less tax while my income is increasing.
You would not happen to be a supporter of a government run health plan would you? Then how can the government run a health plan and not send out a fucking check?
Because the system sucks when you actually have money.
When I was filling out the 1040EZ form, yeah it was a snap. Now that I am making significantly more, owned a couple of houses, have 2 kids, my elderly father is living in a second house that I own, etc. It blows.
jenniebee
@Bootlegger: why is it that, to a certain mindset, $22,000,000,000 is chump change that you can’t do anything with, but that $500 out of $20,000 per month is the equivalent of the Sack of Carthage?
Max Peck
Why would they do that? Are they stupid. Taxed income is better than no income or less income. And if they stepped aside out of some kind of weird protest someone else will stpe in and fill their role so overall there’s no loss of production for society. They are only hurting themselves. Either way the whole idea of taxes reducing productivity is a myth.
Martin
Ok, why the fuck do we allow people to discuss tax policy when they don’t understand the difference between markup and margin?
srv
Make up all the math you want, math boys, you can’t put a number on FREEDOM!
Martin
Well, the real crime is that the IRS should at this point have a website that walks you through the forms, filling in the data *that they have already received* for you, and doing all the mathematical and cross-reference bits behind the scenes.
Even if the tax code was complicated, doing your taxes doesn’t need to be nearly as hard as it is – even TurboTax (which is pretty good) makes it harder than it could be because it doesn’t have access to all the paperwork that your employer and banks and whatnot have submitted to the IRS.
Lee
@Martin
Check out that link about refuting the FairTax plan.
They sent out the same data to 45 tax professionals and got back 45 different results.
There are examples of the same thing happening with the IRS. I don’t have a lot of confidence that the IRS can create such a program.
It would be excellent if they did. I am more confident that accountants and tax lawyers will always be able to work the system better than a program could resulting in me paying less tax.
Xoebe
For the record, a ten dollar bottle of wine, with 8% sales tax.
Normal retail: $10.00 + 8% tax = $10.80
Discount the wine by 1/3 and no tax.
$10.00 *66.7% = $6.67 + 0 tax = $6.67
What percent of $10.80 is $6.67?
6.67/10.8=.61759 = 61.76%
The difference between 100% and 61.76% is
1.00000-.61759=.38240
38.24% = the value of the discount expressed as a percent
Now, 0.3824*10.80=4.12992
That is the dollar value of the discount, $4.13; which happens to be $41.3% of ten dollars.
Your friend was confused, because he was applying the calculated discount of the taxed value to the untaxed original amount. He made it waaaaay harder than it needs to be, and was wrong.
Sorry, I just had to post this, it was really bugging me.
BDeevDad
For those frustated with the state of math education today there was a great TED talk about how we should change math education and focus more on probability and statistics.
I always find it interesting that people have no problem saying they suck at math when required to do simple arithmetic. Would you proudly claim you cannot comprehend most of the things you read?
Grumpy Code Monkey
@ZachPruckowski:
Of course, the counter argument is that the pretax price of the pencils would be lower, since the pencil manufacturer isn’t paying taxes on the materials to make the pencil and isn’t paying payroll taxes. If the pretax price for the pencil goes down to 77 cents, then your family hasn’t lost any purchasing power.
I also have some lovely swamp land to sell you. I can see token pretax price reductions so everyone can proclaim the system is working, but I suspect reality will be closer to your model. Consumers will lose purchasing power on new items while manufacturers see windfall profits.
Martin
Well, since the only result that matters is what the IRS comes up with, their system would become the correct one simply by fact that they did it.
But since the IRS computing technology is 40 years old, they really need to get that under control first – so there are other reasons why I don’t have confidence that that IRS can do it, but they’re going to have to solve that problem eventually.
steve s
In my day job, I tutor Alg, Alg2, Precalc, Trig, and some Calc. I’ve been saying for years that prob and stat is the single most important math for people, and very little attention paid in school to it. We are constantly having to make decisions based on that kind of info, and the average person has almost no grasp of it. Stocks or CDs, smoking, the lottery, automobile crashes, food-borne illnesses…every day people make decisions that need a decent understanding of prob and stat. Complex roots and the Intermediate Value Theorem? not so much.
Suicidal Zebra
You can have my Complex Analysis textbook when you pry it away from my cold dead hands.
Adrienne
@david1234: Prove it.
Adrienne
@Zifnab: The income tax system has been functioning with increasing success since 1917. Why are we suggesting we turn the whole system on its ear just to satisfy nebulous ideological purity tests?
Exactly. And turning the whole system on its ear doesn’t sound very conservative.
Oh, yeah. Right. My bad. Move along.
smedley
Has anyone really checked the ratings for these programs? I mean, Dennis Prager and Hugh Hewitt talking math and taxes!!!!!! LISTENING to paint dry would be more fun.
Blue Neponset
The real cost on consumers would be the price of a wholesaler’s license.
People would go out of their way to avoid a 30% sales tax.
The Mechanical Eye
Do they teach math at Prager University?
DU
Brachiator
@Adrienne:
It’s more accurate to say that this situation is regressive, but this is not quite the same thing as saying that it is fundamentally unfair.
There’s no law that says that middle income people can’t invest in capital assets, and one of the strangest things I continue to see is the weird and entirely arbitrary self-imposed constraint that some folks place on themselves. They think that they can only get money from “hard work,” and savings accounts and maybe from gambling. But moderate income people can do well investing in stocks and mutual funds. And people who sell their personal residence or rental property that they have acquired can also benefit from capital gains rates.
And I don’t even want to get into farm income.
ZachPruckowski – A unbiased way to calculate the effect of a tax is “what does having this tax in place cost me”. Let’s look at a family making $80,000.00. T… At 2009 tax rates, they pay $9525.00 in income taxes^, giving them $70,475.00 in after-tax income.
I see what you are trying to get at here, but it is kinda like comparing apples and kiwi fruit. And your constraints are unclear. Is your family just a husband and wife, or does it include kids as well? A two person household filing a joint return on wages of $80,000 would owe $7560 in taxes using the most current rate info, and have after tax income of $72,440. But after this, there are too many variables to make a good comparison between an income tax and a national sales tax.
Martin – Even if the tax code was complicated, doing your taxes doesn’t need to be nearly as hard as it is – even TurboTax (which is pretty good) makes it harder than it could be because it doesn’t have access to all the paperwork that your employer and banks and whatnot have submitted to the IRS.
This is not true of all tax programs, or even some pilot IRS and state income tax sites that pull in W-2 and some Form 1099 data. I’m pretty sure that the ability to pull in W-2 data was a feature of the 2008 Turbo Tax program as well.
Adrienne
@Brachiator:
Point taken, but we have a difference in opinion. I believe regressive taxation is fundamentally unfair. Period.
b-psycho
My tax simplification plan I’ve toyed around with: Replace the entire tax code with two taxes, one on pollution and natural resource extraction, and one on automated financial transactions.
No tiers, yet would be sharply progressive anyway due to what it applies to. Also has the benefit of being simple, and most of the general public wouldn’t even notice it.
Adrienne
Sure, they can invest, but that’s not what I’m talking about and I think you very well know the difference….
a) Their investments are probably long term investments vs. investments set up in place of wages. Middle income ppl have to actually, you know, make the money first.
b) Most ppl don’t have the option of setting up how their company compensates them. Warren Buffett or Steve Jobs on the other hand….
Brachiator
@Adrienne:
Social Security and Medicare taxes are regressive. Are they unfair also?
I agree with you to a large degree that it is socially and fiscally desirable to reduce the impact of some taxes on lower income wage earners, but the tax code is riddled with all kinds of levels of unfairness, sometimes even when it is trying to “help” low income people.
Sorry. This is not always true. I am amused when people talk about how “little” money they have and then go to Vegas or to the track and spend considerable chunks of money on gambling. And then complain when they are taxed at ordinary income rates on their winnings.
I absolutely stand by my earlier statement that a lot of middle income people have a mental block when it comes to looking beyond wages to investments. They think it’s too complicated or only for rich people, or they don’t want to know. This is also why 1 in 3 lottery winners are in financial trouble within 5 years of hitting the jackpot.
Brick Oven Bill
Re: Checkity-Checking Math
0.396 – 0.360 = 0.036
0.036 * $600,000,000,000 = $21,600,000,000; or
$21.6 billion/year
Thus the single stimulus package of $866 billion, or something like that, has consumed:
$866 billion / $21.6 billion/year = 40 years and 1 month of ‘taxes on the rich’, before any of this other spending.
This is again why they are raising taxes on cigarettes. Maybe the government should just spend less money.
Allienne Goddard
BOB:
No, if the 36% tax produces 600 billion dollars, then a 39.6% tax will produce 660 billion dollars if the taxable amount remains the same. Your mistake is in multiplying the increase of 3.6 percent by the previous amount raised by the tax, instead of the taxable amount itself.
Of course this is oversimplified since 39.6% is a marginal rate.
mattH
Interesting, all this discussion about “greater saving and investment” and yet no connection between that and our current financial crisis. Don’t forget that much of this rush to 12% ROI from “safe” investments was a result of TOO MUCH money lying around with nowhere to go.
Steeplejack
@r€nato:
A small blessing. Most guys I know like this figure a 10% tip to the penny.
inthewoods
Want to see some really tortured math – check out the “article” in the NY Post on the Healthcare bill:
http://www.nypost.com/seven/07162009/news/regionalnews/dem_health_rx_a_poion_pill_in_ny_179525.htm
As far as I can see all the math is wrong. To start with, it’s a tax on adjusted gross income (AGI) – not income – so the base level income that they show for tax purposes is incorrect as it doesn’t take into account top-line deductions.
Secondly, people are surcharged only on the amount over the baselines.
So, in the Post’s example:
Single Wall Street Earner: $285,000
New health care tax hike of 1%: $2,850
I think this is wrong – as the bill states: You’re charged the surcharge, as an individual, on the income that exceed $280k.
So he’d be taxed 1% on $5k = $50.
Second Post example:
Couple making $1.5m
New healthcare tax hike: $81,000
Again, seems incorrect – they’d be charged $5000 on the first $500k, $7500 on the second $500k and finally $8100 on last $500k. So the total would be $20,600 rather than $81,000.
Can anyone confirm my math? Am I reading this bill correctly?
Don
“But, at the end of the day, who cares? 23% tax at the counter. 23% tax out of your paycheck.”
NO NO NO! This is the whole point.
If you pay 25% tax on a $1 item you have a total outlay of $1.25. We all agree on this, yes?
$1 – Cost of item
$0.25 – Amount of tax paid.
What percentage OF THE $1.25 THAT YOU PAID was tax?
0.25 / 1.25 == 0.2, or 20%.
20% is not the same as 25%
Steeplejack
@Don:
But the rate of the tax (25 cents) on the item ($1.00) is 25%.
Where I live the sales tax is 5%. No one goes around saying, “Hey, the sales tax here is 4.76 percent,” just because $5.00 is 4.76% of $105.