Monday, November 21, 2011

Next Time Look Up The Tax Tables

It is clear that progressives are going to make income inequality a central theme in the upcoming elections. Can't really blame them. God knows President Obama can't run on the economy.

Yes, yes, yes.... "It would have been a lot worse, if the stimulus bill wasn't passed". We all heard that talking point. No need to repeat it ad nauseum. And yes, yes, yes.... "It is all Bush's fault".. We heard that too. But let's face it. It is a lot easier to run on low unemployment and a prosperous economy than try to prove a negative or blame a precedessor most Americans prefer to forget.

Any discussion about income inequality will include the progressive assertion that the "rich" pay less income taxes than the poor. Immediately followed by the assertion that the GOP is the party of the rich. Not very original but still very much in vogue.

Rolling Stone published a rather lenghty article by Tim Dickinson that purports to document how the Republican Party became the party of the rich. The subtitle states:
The inside story of how the Republicans abandoned the poor and the middle class to pursue their relentless agenda of tax cuts for the wealthiest one percent

That's a shocker. I didn't think progressives EVER believed that Republicans cared about the poor and the middle class. Despite this little progressive heresy about the GOP caring about anyone but the rich, the author immediately gets back on track and begins the process of railing against the unfairness of Republican tax policy. Just how unfair? According to Mr. Dickinson:
Today, a billionaire in the top 400 pays less than 17 percent of his income in taxes – five percentage points less than a bus driver earning $26,000 a year.
Billionaires paying 17% in taxes while someone making $26,000 paying 22% is VERY unfair. Even Republicans would agree with that! (insert sarcastic tone) If only it were true. But it is not.

I am not a billionaire so I won't dispute the 17% rate. I suppose it is possible after hiring lawyers, accountants and taking advantage of every credit and deduction available. But I have filled out enough Form 1040s in my life to immediately suspect the 22% tax figure.

A quick Google search and... tada! Here are the tax rates for 2010 (scroll to page 2) if your filing status is "Single":
$0 - $8,375 the tax rate is 10%
$8,375 - $34,000 the tax rate is 15%
$34,000 $82,400 the tax rate is 25%
$82,400 the tax rate is  $171,850 28%
$171,850 $373,650 the tax rate is 33%
$373,650 and over the tax rate is 35%
Clearly it is statutorily impossible for anyone making $26,000 to pay more than 15% in income taxes. Actually, they way taxes are assessed is that the first $8,375 is subject to a rate of 10%. The remaining $17,625 ($26,000-$8,375) is subject to th 15% rate. Therefore, the effective rate is lower than 15%.

An easier way to calculate the taxes due on $26,000 is by simply looking up that 2010 tables. For $26,000 the taxes - as a "Single" filer - is $3,485. That works out to a 13% effective tax rate.

Of course, that assumes a taxable income of $26,000. Again, anyone who has ever filled out a Form 1040 knows that income and taxable income are two very different things. The standard deduction for an individual in 2010 was $5,700. That reduces the taxable income to $20,300 ($26,000-$5,700). A quick look at the tax tables reveals a tax bill of $2,623 or an effective rate of 10% on earnings of $26,000.

But wait! There is more... (insert Billy Mays tone) A personal exemption of $3,650 reduces the taxable income to $16,650. Another look at the tax tables reveals taxes due of $2,075. Therefore, the effective tax rate on an income of $26,000 is 8% (2,075/26,000). Even if payroll taxes are included the total rate is 13.65% (8%+5.65). That's hardly the 22% claimed by the Mr. Dickinson.

After confirming my suspicion, I didn't even bother reading the rest of the article. If an author makes such a glaring mistake on tax rates, how can the rest of the information he presents be trusted?  Mr. Dickinson is free to make his case that Republican tax policy favors the rich. But he needs to stick to facts.