FYI: The highest income tax rate is 39.6 percent. A single person pays that on taxable income over $450,050. A couple pays it on income over $466,950. Earn another $1,000 and the U.S. Treasury claims $396 of it.
Only 1 percent of households pay anything like that rate. So the other 99 percent of us don’t face such punishment, right
Regards,
Ted
https://assetbuilder.com/knowledge-center/articles/its-time-to-chuck-our-tax-system
Comments
- subsidies (such as for health insurance) and tax credits (such as the EIC, though he doesn't explicitly state this) significantly increase marginal tax rates.
- Cruz has the right idea with a flat tax and a big deduction.
Because of basic arithmetic, there are only three options regarding support for lower income earners. Don't provide any support, provide support that phases out (which creates higher marginal rates in the phaseout region), or provide the same support for everyone including the 1%'ers.
Burns is using marginal tax rate anomalies to discredit the subsidizes he doesn't like, but not all of them. He also doesn't address the flip side - that treating everyone the same subsidizes the rich as well as the poor. (Perhaps Clinton/higher education comes to mind.)
Cruz would keep the EIC (the phaseout approach). That seems to be politically popular across the political spectrum. Like the ACA premium subsidy, the EIC phaseout also adds 16% (well, 15.98%) to the marginal income of a $30K individual with one child.
(Source: CBO, Illustrative Examples of Effective Tax Rates ..., Figure 1, panel 3, p. 14)
The big deduction: Cruz would increase the standard deduction from its current $6,300 per filer to $10K, but slightly decrease personal exemptions from $4,050 to $4K. Ignoring the latter, this proposal would (at least for those making over $10K) reduce everyone's taxes by $370 (based on the proposed 10% flat tax rate). This is the subsidize everyone approach.
That's the arithmetic so far as subsidies go (don't, subsidize all, or phase them out creating pockets of high marginal rates).
There's also the approach of increasing deductions. The issue here is that they tend to help higher earners more - either because those people are in higher marginal tax brackets, or lower income people are paying no taxes in a flat tax regimen with a significant floor before taxes kick in.
Switching from insurance premium subsidies (with their marginal tax rate distortions) to a system of tax deductions (expanding the use of HSAs) is an example of adding deductions. This is what Burns (by praising Cruz' tax proposals) seems to be advocating.
How does one reconcile special deductions like HSAs (or for that matter, charitable deductions) with flat taxes? Or at least with "simplified" taxes?
- He counts the employer's contribution (7.65%) as taxes that the employee pays. But if the employee is the one actually paying that tax, the employee is also earning that amount. Add this virtual amount to the worker's income and all the tax rates drop somewhat. Let's be arithmetically honest here.
- He omits the 1.45% (excuse me, 2.90%) that even the top earners pay on their salaries and bonuses. (Well, except for things like carried interest, that don't count as wages.)