Taxes Are the Price We Pay for Civilization

One of the readers of this blog asked me to go over the federal income tax plans of the candidates again. In a previous post, I listed several of the average incomes and the average amount of change each candidate's tax plan would have if enacted. Although I feel that the information I provided demonstrated a definite trend, I was pressed on this issue because the examples did not show enough information on the "middle class." I am going to try to outline this is clearly as possible with information from the Urban-Brookings Tax Policy Center.

If your taxable income is:

$0-$19,000 (20% of population)
You would pay $567 less under the Obama plan and $19 less under the McCain plan.

$19,000-$38,000 (20% of population)
You would pay $892 less under the Obama plan and $113 less under the McCain plan.

$38,000-$66,000 (20% of population)
You would pay $1,042 less under the Obama plan and $319 less under the McCain plan.

$66,000-$112,000 (20% of population)
You would pay $1,290 less under the Obama plan and $1,009 less under the McCain plan.

$112,000-$227,000 (15% of population)
You would pay $2,300 less under the Obama plan and $3,200 less under the McCain plan.

$227,000 and above (5% of population)
You would pay $23,000 more under the Obama plan and $15,000 less under the McCain plan.

Obama's plan would also:

• not tax seniors who earn less than $50,000 per year
• issue a $4,000 credit per child in college
• issue a $500 per worker credit for those who make $150,000 a year and do not itemize
• change inheritance tax to 45% for those estates over $3.5 million
• continue to withdraw Social Security tax on those who make over $250,000 per year, but keep the moratorium for those who earn between $102,000 and $250,000; the current tax is taken out up to $102,000

McCain's plan would also:

• double dependent credit from $3,500 to $7,000
• set inheritance tax at 15% for all estates over $5 million
• cut corporate taxes from 35% to 25%

The overall impact on the federal budget is that Obama's plan returns $700 billion to the budget and John McCain's would cost $600 billion. To be fair, these figures are muddied by assumptions that we cannot make, like the cost of war, government spending and the world economy.

For comparison, here are tax bracket from 2007:

You pay 10% if you:

• file as single and and your taxable income is $0 – $7,825.
• file as married filing jointly or qualified widow(er) and your taxable income is $0-$15,650.
• file as married filing separately and your taxable income is $0-$7,825.
• file as head of household and your taxable income is $0-$11,200.

You pay 15% if you:

• file as single and and your taxable income is $7,826-$31,850.
• file as married filing jointly or qualified widow(er) and your taxable income is $15,651-$63,700.
• file as married filing separately and your taxable income is $7,826-$31,850.
• file as head of household and your taxable income is $11,201-$42,650.

You pay 25% if you:

• file as single and and your taxable income is $31,851-$77,100.
• file as married filing jointly or qualified widow(er) and your taxable income is $63,701-$128,500.
• file as married filing separately and your taxable income is $31,851-$64,250.
• file as head of household and your taxable income is $42,651-$110,100.

You pay 28% if you:

• file as single and and your taxable income is $77,101-$160,850.
• file as married filing jointly or qualified widow(er) and your taxable income is $128,501-$195,850.
• file as married filing separately and your taxable income is $64,251-$97,925.
• file as head of household and your taxable income is $110,101-$178,350.

You pay 33% if you:

• file as single and and your taxable income is $160,851-$349,700.
• file as married filing jointly or qualified widow(er) and your taxable income is $195,851-$349,700.
• file as married filing separately and your taxable income is $97,926-$174,850.
• file as head of household and your taxable income is $178,351-$349,700.

You pay 35% if you:

• file as single and and your taxable income is $349,701 and above.
• file as married filing jointly or qualified widow(er) and your taxable income is $349,701 and above.
• file as married filing separately and your taxable income is $174,851 and above.
• file as head of household and your taxable income is $349,701 and above.

An individual pays tax at a given bracket only for each dollar within that bracket's range. For example, a single taxpayer who earned $10,000 in 2007 would be taxed 10% of each dollar earned from the 1st dollar to the 7,825th dollar (10% × $7,825 = $782.50), then 15% of each dollar earned from the 7,826th dollar to the 10,000th dollar (15% × $2,175 = $326.25), for a total of $1,108.75. Notice this amount ($1,108.75) is lower than if the individual had been taxed at 15% on the full $10,000 (for a tax of $1,500). This is because the individual's marginal rate (the percentage tax on the last dollar earned, here 15%) has no effect on the income taxed at a lower bracket (here the first $7,825 of income taxed at 10%). This ensures that every rise in a person's pre-tax salary results in an increase of their after-tax salary.

Approximately 2.5 million filers fall into the top two brackets listed for 2007 out of over 100 million plus filers and only the wealthiest 5% of America's households make over $174,000 per year. Obama is certainly appealing to the masses in this case while McCain joked that you are middle class if you make less than $5 million per year (yes, this was a joke). However, while McCain ran against George Bush in the Republican primaries in 2000, he said "I don’t think the governor’s tax cut is too big–it’s just misplaced. Sixty percent of the benefits from his tax cuts go to the wealthiest 10 percent of Americans–and that’s not the kind of tax relief that Americans need. … I don’t believe the wealthiest 10 percent of Americans should get 60 percent of the tax breaks. I think the lowest 10 percent should get the breaks." He continued his objection in 2001 and 2003 when he voted against these same tax cuts before finally agreeing to pass them because he felt it would hurt the economy if tax laws were changed. Now his plan is just a continuation of these same tax laws.

I don't think that either of these tax plans are perfect. In my opinion, each plan has flaws (one more than the other), but hopefully, this brief outline helps you make a decision this November. Taxes, though, are a highly sensitive and highly personal matter and you need to decide what is best for your family and which candidate supports your ideals.

The title of this blog is a common misquote from Oliver Wendell Holmes, but the intent is correct.