Many people do not understand how our tax code works. Every person has a tax rate based off of their income….your tax rate before deductions is called a “marginal tax rate” and you can find yours HERE. But NOONE….not a person alive pays these rates. They call it government spending through the tax code and as Ezra Klein puts it:
The costs are significant. Huge, in fact. Tax expenditures now cost the federal government $1 trillion annually — more than Medicare and Medicaid combined. And they’re regressive.
There is also a pattern to these programs: The more a government social program benefits wealthier Americans, the less obtrusive it is. We design policies for the poor in ways that make it hard to escape the knowledge that the government is providing help. But richer Americans rely on programs that are “submerged.”
Source: Ezra Klein
So if a person is making $388,350 or more in 2012 – they’re in the top tax bracket of 35%. But here is where government “spending” comes in; legislators will write tax deductions into the ever expanding tax code to influence or reward the behavior of any particular person who does X. When it’s all said and done…a person like Warren Buffett – the 3rd richest man in the world – pays an EFFECTIVE tax rate or real tax rate of about 17.7%. This is without a CPA or special tax person; he does himself. He had the lowest tax rate compared to all of his employees.
Buffett revealed in a letter sent to Huelskamp that his adjusted gross income was $62,855,038 last year and that he paid $15,300 in payroll taxes, as reported by CNN Money. He also claimed, as he had in an op-ed previously this year, that his federal income tax bill last year came to $6,923,494, or about 17 percent of his $39,814,784 taxable income.
Source: The Hill.
So – how did his rate go from 35% to 17%? That’s where the spending comes in. As Ezra Klein points out – the benefits of the government spending through tax expenditures are done in a way that is not seen. So most people don’t realize that they’re benefiting from a government program. Another really excellent example is capital gains. If a person makes $100,000 in capital gains i.e. selling stock, selling a home etc they pay 15% minus deductions; however – if a person makes $100,000 in salary – they pay 28% + a payroll tax – deductions. There is a very, very clear reason why – 57% of all capital gains go to the 1% – source HERE.
The Center on Budget and Policy Priorities explains how these tax expenditures are skewed towards the wealthiest Americans:
Consider how the home mortgage interest deduction affects two households’ decisions to purchase a home:
- An affluent investment banker who has a $1 million mortgage and pays $40,000 in mortgage interest each year receives a housing subsidy of $14,000 annually. The banker pays 65 cents of every dollar of mortgage interest, and taxpayers pick up the remaining 35 cents.
- By contrast, a typical middle-class family, such as a welder or a nurse making $60,000 and paying $10,000 a year in mortgage interest on a more modest home, will receive a housing subsidy worth $1,500 annually. Here, the family pays 85 cents of every dollar of mortgage interest and taxpayers pick up just 15 cents.
And Ezra Klein does a good job of explaining how these hidden tax expenditures impact people:
If Americans who either rent or own their homes outright were asked to accept a tax increase of $150 billion in order to subsidize the mortgage payments of their indebted friends, it seems unlikely they would find that appealing. The same goes for asking Americans who don’t get health insurance through their work to spend $100 billion or so annually subsidizing the benefits for those who do. Of course, that’s exactly what’s happening right now, but it’s hidden in the tax code, so most Americans don’t know it and can’t protest it.
But this is how significant tax expenditures are…the government spending through the tax code:
If tax expenditures were classified as spending rather than tax benefits, they would constitute the single largest category of federal spending — consuming more resources annually than Social
Security, or the combined cost of Medicare and Medicaid, or defense or non-defense discretionary spending. Together, these tax incentives and other tax breaks reduce federal revenues by over $1 trillion annually, or roughly 7 percent of the gross domestic product (GDP).
You can read more about the corporate tax clusterfuck HERE.
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