The U.S. Tax Code 101

With all of the talk about “extending Bush era Tax cuts” and whether they should be extended and to whom, I thought I would pop in and tell you my thoughts.  I know that not everyone has the time to read or watch the news or the desire to read the same kinds of books I do, so hopefully I can help explain what is going on.  I will be as short and succinct as possible (I know you ladies and gents, unlike myself, lead interesting lives ;)

Hopefully my tax accountant family members will chime in if I get something wrong.

First of all I feel that I should define a few words that are often thrown around in elections years.

GDP or Gross Domestic Product – This is the total value of goods and services provided in a country in one year.  In ordinary speak: the total value of all of our exports, all sales of goods, all sales of services and basically all money earned for everyone in the US combined.  What I do NOT know is if it only entails goods and services, or if this also includes investment income (401k, IRA’s etc.)

U.S. Debt – The amount we owe to other countries, people or to our own citizens in the form of treasury bonds.  In ordinary speak: the total amount the U.S. has borrowed including interest.  Think of adding your mortgage, students loans, car loans, credit cards, other personal loans you may have, etc together.  As of this writing, the U.S. Debt is about $15,895,000,000,000.  You can see what it is now here.

Deficit – The amount we are short when we subtract our expenses from our income.  Think of balancing your budget or checkbook and if you are in the red at the end of the month, you have a deficit.

Ok.  Now that we have our vocab lesson out of the way we can get into the fun stuff.  I’m sure you have heard on the news how there are two different tax bills floating around there.

  1. Extend the “Bush Era” tax cuts to everyone (this is the one the House of Representatives likes)
  2. Extend the “Bush Era” tax cuts to everyone making under $250k for married filing jointly and let them expire for everyone else (this is the one the Senate likes).

I think my explanation so far has been unbiased and correct (to my knowledge).

Now I depart from unbiased and move completely into my opinion.  Feel free to disregard it or adopt it as your own.  Obviously I would prefer you share my opinion, because I’m right :)

Lets get one thing straight.  These tax cuts started in 2001.  After 11 years, I think it is foolish to continue to call them “tax cuts”. They were tax cuts at the time, but they have been extended for so long that they are now the status quo.  This tax system is all that anyone who entered the work force since 2001 has ever known, including myself and most people that I graduated high school with.  That is the reality, so I will no longer be referring to this argument as whether or not we should be “extending tax cuts” but  whether or not we should “raise taxes” on families making $250K or more.

It should come as no surprise to you, especially considering my fondness for Milton Freidman, that I am in agreement with the House in that we should not raise taxes on anyone.  As good old Milt said, ““I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever possible.”  I feel that way because I think that I can do better things with my money than the government can.  For every dollar that I send to Washington, the federal government wastes half of it in regulations, unnecessary bureaucracy and pork.  I would rather give one whole dollar directly to a hungry person, than let the government pocket half of it and then divide what is left between infrastructure, military spending, social security and all of the programs that are supposedly there to help feed the hungry.

I should clarify something before some of my friends and family have a conniption.  I am not an anarchist.  I do believe in the federal government and I do believe they have a roll to fill and that yes, they do need tax dollars to run.  I do not believe that every pie the Federal Government currently has it’s fingers in is a necessary pie.  There are those that think that because I am not for nationalization of something, means that I am against the thing itself.  This couldn’t be further from the truth.  I just believe that the thing can be done better, more effectively, more efficiently and more cost effectively by either the state, town or person.

For example if I were president, the first thing I would get rid of is the Department of Education.  Some would assume that means I am a barbarian who think people shouldn’t learn.  It would surprise them to know that I spend more hours a day educating myself and my children then most people do while at their full time job.  They would be surprised to know that I think that education is one of the most important things people can do to better themselves and expand their sphere of influence.  A few years ago, the average cost per student in my state was nearly $13,000 per year, with a peak of $24,000 in one city.  The per student cost in my home is a tiny fraction of that (and I am including myself as a student which includes my ever growing history/political book addiction and Matt with all of his $400 medical books). Granted I don’t have a salary, and I double as the cafeteria lady and the janitor, but nor do I have union dues to pay and union regs to deal with.

I also believe that you can’t force someone to learn, but it’s something you have to hunger for yourself.  Education is not a “one size fits all” program that can be dictated from Washington. No matter how much money is thrown at it, our children will not succeed unless we stop micromanaging everything that they do and allow them to be themselves.  It is no coincidence that our graduation rates drop every time Washington gets it’s dirty little fingers into our education requirements.  Our country once led the world in primary education, but history has shown that the US Dept. of Education is one of the worst things this country has done to teachers and students.

That is just one example.  I could give you many more.  All you need to do is ask :)

There is another reason why I am against raising taxes at all.  I’m sure you have heard something along the lines of “the rich will get tax cuts on the backs of the poor and middle class” or “the poor and middle class will have to pay for the tax cuts for the rich”.  These talking points are nothing more than blatant lies.

If you get up every morning and go to work, the paycheck you get at the end of the week is the money you have earned with a healthy chunk of it confiscated for taxes (like state, federal, FICA and Mediwhatever).  You worked, you got paid.  If your tax rate is lowered you get to take more of that money home to use how you see fit.  If your taxes are raised you have less of it to use.  It really is that simple.

Lets pretend that my tax rate goes up but your tax rate goes down.  I have more money go to Washington and less in my pocket to buy groceries.  You have less go to Washington and more in your pocket.  My money did not go into your pocket.  It went to Washington.  Therefore, I did not pay for your tax cut even though I have less money in my pocket and you have more.  You were just allowed to keep more of your own money that you earned and I was allowed to keep less of mine.

But it’s even worse than that.  The talking heads keep talking about how “the poor and middle class will have to pay for the tax cuts for the rich”.  They are, in essence saying that if everyone pays the same thing they have been paying for the last ten years, then, somehow the poor and middle class are paying more… even though they are paying the same.

It comes down to a basic ideological difference between the Big Government politicians and myself.  I believe that I earn my money.  It is not given to me by the government.  I provide a service or product directly to another person and they pay me for it.  If, for some reason we lived in a communist nation where everyone got the same paycheck directly from the government no matter what job they had or how long they worked for or whether they worked at all, then maybe we could say that our money comes from the Government.  But it doesn’t.  The government doesn’t create or make anything, it “makes” it’s money by confiscating it from someone who did make something.  The government cannot pay for something without having first taken that money from someone else who, chances are, will not benefit from what the government wants to do with that money.

Before any of you scream “but you are in the military, you ARE paid by the government!” Yes, you are right.  We are in the military and we are paid by your federal tax dollars.  We also provide a valuable service in exchange for that payment and we also pay taxes on that paycheck, so in a sick sort of way we are helping to pay our own salary.  Even within the military we do not all get paid the same.  Matt has a select set of skills and knowledge that are hard to come by in the Military, so he is paid more than someone with a job that anyone can be trained to do.  While both jobs are important, one is more easily replaceable than the other.  That is supply and demand.  Even someone who starts out at the bottom can acquire skills and knowledge that make him/her less replaceable, and as such, their compensation goes up.  That is how it works.  The more you know and the more you can do, the more valuable you are, even in the military.

I cannot say the same for all government programs.  Throw unions into the mix and it’s even worse.  But that is a post for another day ;)

Tax avoiders are not the same as tax evaders.  Our tax code is 73,608 pages long.  (That’s about 26.5 feet tall) Those pages are full of rules and regulations and what some people call “loopholes”.  I don’t call them “loopholes” I call them tax deductions.  Honestly, when was the last time one of us said, “You know, I don’t think I’ll take the mortgage deduction or the charitable donation deduction.  I don’t want to take advantage of these unfair loopholes.”  Um… never.  Even these holier than thou Hollywood elites who are clamoring “for the rich to pay their fair share” hire really smart tax guys so that they can pay as little tax as legally possible.  In fact, many of them, while they live in California, have legal residency in a state that has no state income tax.  So what they are really saying is that everyone else should pay their fair share, because they are paying more than enough.  Kind of like how Warren Buffet is saying the rich should pay more while at the same time suing the IRS to get the $1 billion he owes in back taxes lowered.  That is what the rest of the world would call “hypocritical”.

The reality of the situation is that most of these big bad corporate businesses and rich guys aren’t cheating on their taxes.  They are taking legitimate tax deductions so that they can lower their tax burden, which can come to more than 50% depending on the state they live in (**cough** California).  So next time you hear the words “tax loopholes” just replace the word loophole with deduction and it will shine a whole new light on the situation.  When you hear politicians talk about “closing loopholes” remember what that means for you and your wallet.  I’m all for a simpler tax code, but I would get there by starting from scratch, rather than adding onto the monstrosity that we currently have.

No one clamoring for tax hikes thinks that it will be more than a tiny drop in the ocean of debt and deficit that we currently have.  It is entirely about “making the rich pay their fair share”.  They are far more concerned about punishing those who make a lot of money then they are about getting our Federal Government’s fiscal house in order.  So what I want to know, is how people who make 250k somehow make it into the “millionaire and billionaire” category.  Last time I checked, 250k was a far cry from 1 million.  You know already that I am not in favor of a progressive income tax in any way shape or form, but it is honestly not a deal breaker for me.  But punishing productive and hard working small business owners (and therefore their employees) is far more “unfair” than than anything that I might suggest.  For 2009 the tax breakdown was as follows

Percentiles Ranked by AGI

AGI Threshold on Percentiles

Percentage of Federal Personal Income Tax Paid

Top 1%

$343,927

36.73

Top 5%

$154,643

58.66

Top 10%

$112,124

70.47

Top 25%

$66,193

87.30

Top 50%

$32,396

97.75

Bottom 50%

<$32,396

2.25

Note: AGI is Adjusted Gross Income
Source: Internal Revenue Service

How is this at all fair?  The top 10% of earners in our country paid more than 70% of our country’s taxes and the bottom 50% paid almost none?  I understand that it is less of a burden for a millionaire to pay taxes than someone who makes 20k.  I also know that the person who makes 20k qualifies for several governmental welfare programs (even more today than 2009) and so they don’t really feel that pinch do they?  Nor do they have any sense of ownership in the country they are benefiting from.  In essence “they didn’t build that”, did they?  Yet they are enjoying all of the perks and more than those of us who do pay taxes.  All they have to do is get the average income low enough so that 51% of the population are on welfare, then have them continually vote for bigger and bigger welfare checks!  That, my friends, is what some of us would call “taxation without representation”.  I seem to remember a war that was fought over that principle.

Lets get one thing straight.  The current tax code is not fair at all, because the “millionaires and billionaires” (and apparently that means everyone making above $250k a year) are carrying nearly all of the burden, not because they aren’t carrying enough of it.

This brings us to the final clarification I would like to make about the current “to raise or not to raise” debate.  Another phrase you will hear thrown around a lot is “Clinton Era”.  A lot of people are saying they just want to get back to “Clinton Era” tax rates.  People remember the 90’s as a very prosperous time, and it was.  We cannot, however, get ourselves back in to the prosperity of the 90’s by having “Clinton Era” tax rates alone.  I would be supportive of “Clinton Era” tax rates if we first got back to “Clinton Era” regulations, “Clinton Era” spending levels (including entitlement spending), “Clinton Era” GDP, “Clinton Era” GDP to spending ratio, “Clinton Era” foreign relations (aka not being in five wars), had “Clinton Era” deficits (aka none for half of the time he was in office) and for good measure, we should probably have someone invent something that will absolutely change the world as fundamentally and completely as the Internet did.

Raising taxes cannot possibly have a positive effect on the economy unless and until we attack the regulations with a chainsaw, fix entitlements, get out of these wars; and for heavens sake, stop increasing the spending!  Unless and until that happens, raising taxes should be the last thing on anyone’s mind.

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5 Comments Add yours

  1. Kira =] says:

    a few grammatical errors, first paragraph- “same kids of books” and in the paragraph that you aren’t an anarchist “There are those think that”

    Like

    1. Courtney says:

      Thanks Kira! I should get a proof-reader :)

      Like

      1. Kira =] says:

        You can delete that comment. I just knew with the OCD that you Ahroon girls have, it would annoy someone. =]

        Like

  2. Kira =] says:

    I love when you get on your political soapbox because again I don’t have time to read the books you have. So thank you for sharing your knowledge of it with me!

    Like

  3. Heather B says:

    Holy cow, what a fantastic post! I couldn’t agree more!

    Like

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