March 3, 2009

Not That I'll Ever Have to Worry About it

Justin Gardner, on Donklephant, one of my favorite blogs, writes the following regarding how many misunderstand the tax system, and why so much of this “redistribution of wealth” claptrap is just that. Claptrap.
Please tell me people in Louisiana aren't really this clueless.

Because after reading stories like this, I think a lot of people believe that tax brackets are things that you fall into and then ALL of your income is taxed at that rate.

This is obviously not true because that system wouldn’t make ANY sense, but ABC apparently found some wealthy people who think it does.

Here’s one such case…

A 63-year-old attorney based in Lafayette, La., who asked not to be named, told that she plans to cut back on her business to get her annual income under the quarter million mark should the Obama tax plan be passed by Congress and become law. …

“We are going to try to figure out how to make our income $249,999.00,” she said.

“We have to find a way out where we can make just what we need to just under the line so we can benefit from Obama’s tax plan,” she added. “Why kill yourself working if you’re going to give it all away to people who aren’t working as hard?”

The attorney says that in order to decrease her income she’ll have to let go of clients, some of whom she’s been counseling for more than a decade.

“This means I’ll have to tell some of my clients we can’t help them and being more selective in general about who we help,” she said. “I hate to do it.” .

First, let’s just state the obvious…if this woman actually turns clients away she is remarkably dumb. Because all she’d be paying is another 3 cents on the dollar for the income she earns over $250K.

The math on this is easy. Let’s just say she makes an additional $250K and her total income is $500K. Do you know what she’s paying right now on that $250K? $90,000. Do you know what she’d be paying with the 3% hike? $97,500. So she’d have to pay another $7,500.

My challenge to you…ask the people you know if they understand how the progressive taxation system works. Seriously. Please ask folks. Because after asking a lot of people I know (and these are smart people) I found that at least 50% of them thought that tax brackets were things that ALL of your income fell into.

Long story short, we can no longer afford for people to be so uninformed about our tax system. Everybody should know how this stuff works and I hope you do your part to make sure that happens.
So Show Me the Down Side...
The attitude of this lawyer seems to indicate that she will do less law, and therefore there will be clients left behind. This argument leaves out the obvious; that new lawyers will pick up the slack. If these new lawyers are fresh out of school, this will aid them in establishing a practice. Good for the economy, and as good for the future of the country as lawyers can be...

Secondly, the argument is faulty when it makes the assumption that a single lawyer working less will diminish the effectiveness of the taxing plan. The inverse is actually correct. If she earned in excess of the quarter million she strives to avoid, she would pay only 5% or so in taxes on the overage. If she shirks this business and another lawyer picks it up, the rate paid will be considerably more than 5%, unless that lawyer earns in excess of $250K.

I can hardly imagine a good, greedy lawyer shirking business, but if she does nobody will suffer. In either event there will be no less service to the community, and tax revenues will increase either way.


Mark said...

Having lived most of my life in the UK, I dream of paying taxes as low as Obama's intended ones. Sure, I'd love to pay lower ones, but hell and little apples where else can you bootstrap from zilch to making over a quarter-million a year in the first place?

Anonymous said...

Somehow a huge number of folks have a total disconnect between paying taxes and reality. These people seem to think that all public services come full born from the good fairy at no cost whatever to themselves - or they think public services come from something that should be paid for by others. They seldom think of what life would be without public services.

Yes, there are a bunch of holes in the public service net and a lot of people fall through it and suffer greatly. I also would agree that there are folks who exist off of the public service net. And there are folks who exist using a smaller percentage of the public service net than others. The whining and bitching about paying for (taxes) public services (government) is minuscule compared to the whining and bitching we'd hear if public services disappeared.

Yes, there is a lot of room to improve things in America. But I don't see many of the repugs becoming expatriates in any significant numbers. You'd think they would be making an effort to improve things instead of building walls and setting fires. Please cut me a little slack on the sweeping generalizations. . .

Mule Breath, said...

Mark, is the U.S. rate so much less than the U.K. once all various taxes are considered? Average 28% Federal income tax with added state assessments ranging from 2% to 10% (Rhode Island), real property taxes, retail sales and use taxes, franchise and inventory taxes on businesses (which individuals pay for in higher prices), inheritance taxes, fuel tax, hotel bed taxes, etc. We pay a good bit of tax.

Jeg, You are so correct, and when folks are screaming for smaller government they often do not realize that the first cuts are always in services. A good, recent example is the failure of the FDA to inspect the Georgia Peanut Corp. plant. Tax money is so thin that bureaucrats tend to overlook much that needs scrutiny, focusing only on that which is currently in the news. We could call this "squeaky wheel reactionism."

Mark said...

Mule, including income tax, NI contributions (involuntary) and suchlike, I'm paying about 37% tax, earning an average £30,000 a year. T'other half makes a bit more than that, and she gets hit for damn near 50%. So... er... yeah, really. Throw in 15% retail taxes (VAT) on most goods, plus very silly energy costs (when you guys were complaining about $4/Gal for petrol, we were paying about $12/Gal, and are still paying a lot more). Drop Council Tax (that is, the taxes we pay to have our bins emptied (once every two weeks!) at over a thousand quid per month, and The UK is punitively expensive to live in. 28%? Ooooh, I haven't paid that since I was 16....

Mule Breath, said...

More than a few of my former colleagues from the remote work I have done were once U.K. residents moved but to Spain or Portugal to evade the taxation, so I was aware of the excessively high income taxes. It was the added taxes of which I was unaware. Thanks for the explanation.

U.S. fuel prices are much lower than almost all of the rest of the world, but that is relative if you were paying under two bucks last month, and the pump price today is over four bucks.

Mark said...

Or, in other words, roughly a quarter of ours.

I look forward to coming home. I'll think of every dollar I pay in tax as helping to rebuild my home - not prop up the Queeen and her tax-sink gubment

Rogue Medic said...

I used to work with a medic, who thought that the tax rate applied to everything he made. He would refuse more than minimal overtime. I took all of the overtime I could get for two reasons.

I could use the money.

He wasn't any better at being a medic, than he was at tax planning.

When it comes to fuel prices, you should include all of the subsidies that come from our taxes. We have troops in many oil producing countries protecting oil. Even before the current wars, we spent billions of US tax dollars to subsidize fuel.

The lawyer in the story does not appear to be someone capable of providing good advice, so is anyone being hurt by less of this spectacular advice? Same cluelessness as my medic coworker.

Another factor that many of these innumerate people leave out is - some payroll taxes go away above certain levels. I think the Medicare tax fades away in the $ 90,000 range.