So I’ve been hearing from Sen. Barack Obama that it’s “patriotic” to pay taxes. He also informed Joe the Plumber that it’s best to “spread the wealth.” The implication is that we’re not already doing that these days. It makes me curious what tax rate the man who might be our next president thinks would be most just.
I’m asking because governments of all levels already take the majority of my income. Indeed, even though I earn about six figures a year, the only reason I can afford to work is that my husband earns more than I do.
How is this possible? Here’s the breakdown for this New York City independent contractor. My federal income tax rate is 35% — calculated from the first dollar since as part of a married couple, I get taxed at my husband’s rate. My Social Security and Medicare taxes come out to 15.3% since, as a self-employed individual, I pay both the employer and the employee part. Already, this puts me up past 50%. Then you have to add in New York State and city income taxes (including a little gem called the “unincorporated business tax” which taxes self-employed income twice in NYC).
The result is that governments take over 60% of every dollar I earn. But the Obama-Biden ticket thinks this is not nearly patriotic enough. They want to add in at least another 4.6 percentage points to bring my federal income tax rate to 39.6%. This pushes me up to roughly a 65% tax bracket.
Now I can see the objection: if I’m lucky enough to be married to a man making over $350,000 per year (roughly the line for the current 35% tax bracket), what do I have to complain about? But marginal tax rates are all about incentives. Why should I work if I only get to keep 35 cents on every dollar I make? At some point, it stops making sense for me to even try to earn money. In essence, the tax code Obama envisions as just will try to do a little more to push me out of the workforce.
This has been an election of oddities. I used to think Republicans were out to get working moms, until the entire conservative wing of the party developed a crush on Gov. Sarah Palin. I thought Democrats were the champions of the working mom — but their tax plan will make it even more pointless for me to try to earn a living once you factor in the cost of daycare. Of course, if I don’t work, that’s $60,000 less in wealth that governments will have to spread around. But hey, why let that pesky little detail get in the way of our zeal to have everyone pay their “fair share?”
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Laura Vanderkam is the author of 168 Hours: You Have More Time Than You Think (Portfolio, 2010) and Grindhopping: Build a Rewarding Career without Paying Your Dues (McGraw-Hill, 2007). She is a member of USA Today's Board of Contributors, and her work has appeared in Reader's Digest, Scientific American, Wired, The American, Portfolio and other publications.
Write to her at lvanderkam at yahoo dot com.
Great post!
Let me point out one thing. You are only looking at percentages. However, we spend money in absolut value. Let me phrase it with an example:
You get ~100k, pay 60k in taxes, and keep 40k for your living expenses.
Someone in a much lower income bracket, let’s say gets 30K, pays less in percentage, say 33% (10K), and thus keeps 20K. Making a living with 20k is not easy.
Clearly, it is the absolut value what matters in this regard. The bread you pay for is not a percentage of your salary.
During tough times, the income gap should be reduced. Any good economist will agree on that. And it’s more than fair to get it from those well off. It’s that simple. Don’t you think so?
A few points about your post:
You talk about looking at your individual salary and your individual tax bracket. But you really can’t do that, because since you’re filing jointly with your husband, you two together are legally considered to have one single salary, and you are taxed as such. When you sign up to get the tax benefits that come with being married (and there are many), you have to stop thinking about your individual income, because that’s not how the IRS treats it. Similarly, when you talk about all the extra taxes added to your being self-employed, you don’t mention that you also get extra deductions in other areas, such as deducting for the rent on your workspace and all the other expenses you incur as being a business owner.
That said, I understand your frustration. My mom was in the same boat early in her career, and it certainly might seem frustrating that you’re not getting more to take home. But, whether you agree with them or not, our leaders have passed budgets to pay for whatever they’ve deemed is important for our government to support, and we have to pay for them somehow. Do you think it’s fair to pass more of the tax burden on the poor and middle-income families? If your family, who can clearly afford it, doesn’t pay a larger share of those taxes, then poorer people than you will have to. You should check out this video of John McCain actually stating the same thing (before this current election, mind you):
http://www.youtube.com/watch?v=X2JPbQOHEkY
Another point is that if you look back over the years, a 39% top federal tax rate is relatively low in the history of our country. Up until the 1980s, the top tax bracket routinely paid 70, 80, even 90 percent (it was 94% at one point!) of their incomes in taxes. And in fact, a top marginal rate of 39% is lower than the top tax rate in pretty much any other industrialized society you can think of. By the way, if you look at Obama’s plan, you’ll actually be taxed at a LOWER rate than you would have under the Clinton administration. And while McCain may say he wants to cut taxes across the board, he rarely brings up that under his plan, people will be taxed on their medical insurance benefits – which would potentially be a very substantial amount of money!
Also, in your 60% tax calculation you forgot to mention that you happen to live in one of the highest taxed states and cities in the country. As far as this election goes, what’s being proposed for that only covers your federal taxes, which is 35% of your income. By the way, you do have the option, of course, of moving to a state like Alaska, where they actually pay YOU just for living there
Lastly, your point about “what’s the point of working if I’m only taking home 30% of my pay:” I would argue that you are in a position of luxury to even be making that statement. Middle and lower class workers don’t have that option. Let’s take people making between $8,000 and $25,000 a year. Even *they* have to pay 15 percent of their income in taxes to the U.S. government. That’s a very significant amount considering the federal poverty level for a family with two parents and two children is $21,200. Most people can’t afford to not work, whatever the tax implications. But the other part of the equation is that even if it doesn’t pay them to work, would they just stop? The numbers of people who apply for welfare show that they don’t. Even if you take a country like Sweden or Norway, which as McCain points out is pretty extreme with how much they’re taxed, and you say, well, why work if you’re not getting any real money out of it, do you see people stopping working? The answer is no.
Here’s the bottom line: During the Bush administration, income inequality skyrocketed to levels not seen since the 1920s. As your family’s taxes were cut, 5 million Americans dropped below the poverty line and real wages stagnated, causing the middle and lower-middle classes to actually get poorer (which answers your other question: no, a huge chunk of people are *not* doing better all in all now than they were 8 years ago). Meanwhile, the country ran up $5 trillion in foreign debt. During the Clinton years, when the top marginal rate was 39.6 percent, job creation was robust, real wages rose, the budget was balanced, and foreign debt was paid down.
Which economy would you prefer?