Saturday, April 15, 2006

Taxing Thoughts

I don't usually post on weekends, but with Monday already to be dedicated to the next update on the rare Transformers auctions, and with today being April 15th, it seemed best to go ahead and post this now.

A recent Associated Press article (EDIT: 10/18/06 - original link is gone) suggested that most Americans think that the current tax system is unfair. This is hardly a surprise. People will most likely always think that they are being taxed more than they should be, and that others (i.e., "the rich," which is usually defined as "anyone who makes more money than I do") are being taxed less then they ought to be.

But perhaps this other recent article (EDIT: 10/18/06 - original link is gone: here's a similar one, but it's not quite the same) can put some of that in context. We have been told that the President and his wife paid $187,768 in federal taxes this year, having reported an income of about $735,000. I did the math, and that comes out to about 25.5% of their income going directly to the Federal Government. A fairly sizeable portion by pretty much anyone's standards. For comparison, a couple with an income of about $73,500 (or 10% of the Bushes income), would pay $9211 in federal taxes, or about 12.5% of their income (assuming they took only the standard deduction of $10,000 for a married couple and no other deductions). This is less than half the share that the Bushes pay. A couple with an income of $50,000 (and the same standard deduction) would pay $5,274 (10.5% of their income) in taxes. Clearly, the graduated system of taxation does indeed result in richer people paying a higher percent of their income to the government.

Or does it? The Vice President and his wife had an income of about $8,820,000. Of that, they paid only $529,636 in federal taxes. That's only about 6.0%! What's going on here?

What I haven't mentioned yet is that, of that $8.82 million, the article says that the Cheneys donated $6.87 million to charity. This means that they were only taxed on $1.95 million. By this standard, the Cheneys paid about 27.2% of their income to the Federal Government, a comparable amount to the Bushes.

There has always been a debate about donations to charity as being a way out of paying taxes, and whether or not that is appropriate. But it's worth noting that the Cheneys did not use that $6,870,000 on themselves. Rather the organizations (usually dedicated to education in the case of the Cheneys) benefited.

Look at it this way, if the Cheneys were taxed at the full 35% rate (Currently the highest bracket) on the entire $8.82 million (incidentally, I know that this is not how the income tax system actually works, but this is for the sake of argument), they'd have paid $3.087 million in taxes. This is far less than the combined amount of approximately $7.4 million that the Cheneys actually gave of their income. Much less even than the $6.87 they gave to charity, not counting the money that went to the government.

Certainly, if the Cheneys had no ability to make charitable deductions, the government itself could have had about $2.5 million more that they could have used for government programs, including programs that Democrats would probably have preferred having that extra money for. But Republicans have always advocated the right to choose how one's money is spent, and far be it from me to say that the educational institutions that received the bulk of the $6.87 million were unworthy of such assistance.

So, at the end of the day, I have to say that the system works. That's not to say that it's perfect, or that it couldn't be improved. But it does provide a mechanism for encouraging that money does, in at least some measure, go from those who have wealth to those who need the extra resources.

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