Thursday, August 19, 2010

Bush Tax Cuts

In January of 2003, a local tax preparer, David Oenbring, sent me this note concerning tax cuts for only the wealthy:
...The common theme is that the plan only benefits the wealthy and the little guy gets nothing. As a tax professional I know that nearly all taxes are paid by the wealthy, after all they are the ones with the money. According to figures from my 2003 Income Tax Quickfinder Handbook the top 25% of taxpayers (those earning over $52,965) pay 84% of all federal income tax. So any reasonable person could assume that any reduction in tax rates would benefit them the most.

But what about the assertion that the poor people get nothing? For that comparison I turned to my tax preparation software and examined the returns of the mythical couple of Joe and Mary Taxpayer. They are married with two children. Both are in low wage jobs earning only $25,000 annually between them.

They have worked since 2000 without a raise and need every penny to survive so both have elected to have no income tax withheld from their paychecks. By any standards they qualify as working poor. I prepared returns for them for tax years 2000 (the last year of Clinton influenced tax policy) and for 2001 and 2002 (the first two years of Bush influenced tax policy). The results cast serious doubt on the claims that the poor received no benefit from the Bush tax policy.

In 2000 Joe and Mary had $971 tax on their combined income of $25,000. They were entitled to a Child Tax Credit of $500 per child, which reduced their tax to $0. The remaining $29 of the credit was lost. The Earned Income Tax Credit (EITC) then gave them a refundable tax credit of $1,290, which was their refund. Nebraska, being less generous, insisted on $212 in tax.

In 2001, the first year of the Bush tax plan, Joe and Mary had only $874 in tax on their combined income of $25,000. This year they qualify for a child tax credit of $600 per child. This again reduces their tax to $0 but now the remaining $326 of the credit ($1200 - $874 = $326) has become refundable. That amount adds to the EITC of $1,494 to give them a total refund of $1,820. Still the spoiler, Nebraska wants $192 in income tax.

This year, the second of the Bush tax plan, their income tax has fallen to $518, only 53% of the tax burden under Clinton. Again, the total available Child Tax Credit of $1,200 reduces this to $0. The remaining $682 of the credit is again refundable and adds to the EITC of $1,928 for a total refund of $2,610. Still not caught up in the spirit of giving, Nebraska insists on $171 of income tax.

So in only two years under a president whose tax policies presumably only benefit the wealthy, Joe and Mary Taxpayer have had a net 103% increase in the amount of free money the government hands them every tax season. (Refundable tax credits are not counted as income and are tax free) Now could someone please explain to me again how the Bush tax plan only benefits the rich?

Update:  By 2008, the top 1% pd 38% of income taxes, the top 5% paid 58% of income taxes, the top 10% paid 70% of income taxes and the top 25% paid 86% of ALL income taxes. 47% paid NO INCOME TAX.

3 comments:

  1. A bit of a strawman argument here. I don't think it's been argued that the working poor aren't getting *any* benefit from the tax cuts. Rather, it's that the rich benefitted much more from them.

    Consider the trend illustrated in the graph here: http://www.cbpp.org/cms/index.cfm?fa=view&id=2908

    Does anybody, rich or poor, think this is a sustainable trend?

    Moreover, have the tax cuts for the wealthy had any demonstrable positive net effect on jobs?

    If I were running for office, I would put middle class job growth at the top of the list. No jobs, no economy.

    Having said all of that, David Oenbring sounds like my kind of guy!
    http://www.omahops.org/gallery/gallery1.html (bottom of page)

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  2. Rock, Clinton admin. benefited from conversion to ROTH IRAs. many middle class paid taxes on their 401K/IRA billions over 4 yrs thinking they would be tax free after that.
    That did a lot of damage to investments in market but then Clinton added tax increases and his last 3 quarters in office were recession. Bush had little choice but to remove those added taxes to end that recession.
    Tax increases never help the economy for long.. and if they get too high, we end up in recession.
    Even JFK gave us tax cuts to get economy going.
    High tax rates in 90%ile caused CEOs to take stock options and pay capital gains *must lower rate* but they could manipulate stock price by making announcements, etc.. REALLY bad unintended consequence of too high rates.

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  3. This recently from the tax preparer about any additional Joe and Mary updates:

    I haven’t updated it but believe me it only gets worse. Ever larger subsidies have been the rule. The IRS is uniquely unqualified to run a welfare program. By their own estimates the fraudulent filings run about 30%.

    On another topic this is a version of what I have sent our congress persons regarding the internet sales tax bill. Feel free to share it as you like.

    Dave

    I’m writing to express my opinion on the expansion of sales tax to online sellers that have no physical presence in the state their customers reside in. The idea that this is some sort of main street fairness action is a red herring. It is rent seeking on the part of mega retailers such as Amazon and WalMart who are leading the charge. Passing such legislation will only make these retail giants less competitive and will do nothing to help small local businesses. While it will put more money into the coffers of state government I don’t consider that a good thing.

    I shop online and I pay my use tax in on my state income tax return. If other citizens don’t feel obligated to do so that is a moral failing on their part or an enforcement problem on the part of the state depending on your viewpoint. My reasons for shopping online are price and convenience. As long as the local store thinks a HDMI cable is worth $40 while the online merchants offers it for $8 my choice to shop online is easy.

    I prepare tax returns for a living. Sales tax is one of the most confusing areas of taxation. Thankfully, at present, I don’t do sales tax returns for other states. Nebraska is hard enough and changes often enough to be all I’m interested in. I do however do income tax returns for a number of small online businesses that could be put out of business by this new legislation. The proposed $1mil exemption is a moving target. How do they prove that and to whom? What follows? Will the states now expect income tax returns to be filed in each state as well? This opens the door to greedy state governments to draw funds away from other states.

    I would hope our elected representatives would not want money taken from Nebraska businesses by other states. That is surely what will happen if we crack the door open with allowing the collection of sales tax without nexus.

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