Thursday, October 14, 2004

Current System Effective Tax Rate

The current tax system also creates an effective tax rate, but unlike the FairTax, it is not an easy or straight forward thing to compute. One should be able to compute the effective tax rate for a taxpayer by taking the amount of taxes they pay and dividing by their income. Unfortunately the amount of taxes paid depends on a huge array of factors. The same income earned different ways is taxed differently. The same income earned by two different households is taxed differently. It is very complicated and confusing.

To try to make this simpler I will take as my model a household where all income is earned wages. I will take into account the payroll taxes, income taxes, standard deduction, and personal and dependent exemptions. I will also take into account the earned income tax credit and the child tax credit, as these are major benefits for poor and middle class taxpayers which depend only on income and number of children. I will only consider Single, Married Filing Jointly, and Head of Household, filing types. Married Filing Seperately is more complicated than I can face.

Below are tables showing the Effective Tax Rate of the Current System. Please note, once again, that you will be able to see the details of the calculations by clicking on the table cell you are interested in.


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1 Comments:

At 6:49 AM, Blogger Ernie Lane said...

Some thoughts I had on the Fair Tax.

The main argument against it eventually gets back to an apparent lack of progressiveness, not enough of a tax on the rich. (I know those aren't the case, but bear with me.) When you get down to it, what burns the liberals about the "rich" is not that they have money, but what they do with it; the 'conspicuous consumption.' We all hear every so often of the person that lived frugally, but died with a multi-million dollar estate. Nobody would have considered him rich while he was alive. On the other hand, we also hear about the person that buys all kinds of expensive toys, but dies basically broke. He's not really rich, but it only seemed he was.

The Fair Tax gets at this consumption directly, and is self-progressive. That is, the average person might buy a Chevrolet, and pay tax accordingly; the rich guy buys a Lexus and pays a lot more tax.

Besides, if your income is large, but you don't spend it, so what?

Further, as you know, the Fair Tax gets at money that income taxes don't: the hidden economy, illegal earnings, and dividends from municipal bonds for starters.

Summary: debates about tax always get to fairness and whether the 'rich' pay enough. One problem is that we have allowed the discussion of what constitutes 'rich' to revolve around income; the aspect of 'rich' that pisses off the liberals is what they _buy_ and 'flaunt.' Change the way we look at 'rich,' and the Fair Tax becomes more of a no-brainer than it already is.

--
Ernie Lane
Trinity, FL

 

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