September 2, 2014

Skin in the Game

Much has been made in the news recently about (supposedly) 50% of Americans who “don’t pay income taxes,” and whether or not they contribute to our national welfare.  An analysis that takes into account all taxes paid shows that everyone has tax skin in the game.  About two-thirds pay payroll taxes, and most pay state and local sales taxes as well as excise taxes on gasoline.

According to the nonpartisan Tax Policy Center, of those with zero tax due:

13 percent are a mix of mostly higher-income individuals with enough itemized deductions for items like mortgage interest, health payments, or charitable contributions, education tax credits, or tax exempt interest to zero out their income taxes.

22 percent are senior citizens who can exclude some or all of their Social Security income (which was taxed previously at the outset) and may have tax-exempt interest from mutual funds and municipal bonds. For those who itemize, charitable contributions and medical expense deductions also subtract from their tax liability.

15 percent are working families, many of them with extremely low incomes, who qualify for one or more of the following credits: the Earned Income tax credit, the Child tax credit, the Child and Dependent Care tax credit.

For the other half of those who don’t pay federal income taxes, standard deductions and personal exemptions are enough to counteract their taxable earnings. A couple with two children earning less than $26,400, for example,  will pay no federal income tax in 2011 because their $11,600 standard deduction and four exemptions of $3,700 cuts their taxable income to nil.

The larger question, really, is this:  How is it that a working couple doing a responsible job for anybody anywhere earns only $26,400 per year? About 25 years ago, our society decided that cheap consumer goods and services were more important than the right of workers to engage in collective bargaining which would have provided a counter-balance to the “race to the bottom” that a focus on stockholder value only naturally produces.  So now we all have cheap consumer goods (relatively) and 50 million households have stock portfolios.  The extra social cost of this cheap labor has been placed onto us in other ways — for health, education and safety.  If businesses won’t pay a worker enough to cover these items, then who picks up the cost?  The answer is we all do, in one form or another…if not through social programs, then through social decay and property devaluation.

What is the likely lifestyle of a Loudoun County family of 4 that makes $26,400 per year?  Best case scenario:  $12.69 per hour for one breadwinner who then has $.72 cents withheld for payroll withholdings (more if the temporary reduction is lifted).  So, (s)he is paying $1,491.60 in taxes per year for those alone.  If (s)he is self-employed, (s)he pays almost twice that.  Housing in Loudoun costs at least $1,000/month for a two bedroom apartment, plus utilities.  That’s $12,000 plus $1200 minimum.  Included in the rent is the real estate property tax that the landlord remits, but which has actually been paid by the family.  Food for 4 even eating rice, beans, oatmeal and macaroni would cost at least $500 a month, buying detergent, toothpaste, soap and toilet paper, too.  That’s another $6,000.  Clothing at thrift stores can be had for $1000 a year for all four if carefully done (including sales taxes). Transportation is a huge expense, because the public bus service doesn’t run on weekends or evenings, so to make his/her job as a waiter, (s)he has to have a car.  A 10-year old Honda would be hard to maintain and insure on the money remaining (includes excise taxes on gasoline and personal property tax on the car itself).  There is nothing left for dental care or eyeglasses, even if you assume the family uses emergency room for acute problems and treats other health issues with home remedies.  This scenario deteriorates drastically for the two-wage families who together earn less than $26,400 per year while shouldering child care expenses.

Now, if you earn more than $250,000 at work, have a large mortgage deduction, and a stock portfolio that benefits from cheap labor, you might convince yourself that this cheap labor force should pay more tax so you can pay less.  That somehow their contribution to society is not yet sufficient.  Really?   What would you like for them to give up in order for you to pay less tax?  Socially we appear to have decided they can’t move in with other families in order to have cheaper housing.  Overcrowding!  The political will to improve public transportation isn’t yet firm.  So, what exactly would you have them do?

We are all part of a system that takes advantage of cheap labor.  First agree to pay a living wage with medical benefits to anyone who works and then let’s talk about tax “equality.”  I could surely be persuaded to lower the social security premium payments on the self-employed (they pay both the employee and employer share).

But if that’s not enough, then think about this:  it’s going to hurt the economy more if you raise taxes on the poor than if you raise them on the rich, because the poor spend every penny they’ve got; if you take a dollar away from them in taxes, that’s a dollar they don’t spend. The billions of dollars the very rich are holding have not resulted in more jobs because there is low consumer demand.  They won’t hire until we start spending.  And we won’t spend more until jobs feel more secure.  It’s quite a dilemma.  But raising taxes on the poor is not the solution.

 

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