Monday, October 17, 2011

How this tax thing works

It’s time for a little economics lesson.

Recently, it came to my attention that no one really understands how taxes work. Yes, we pay them to the government and they use the money to buy things, like war for example. Some people seem to forget that they also pay for things like street signs, street lights, sidewalks and streets, but that’s a topic for another entry entirely.

With the Occupy Movement starting up and people finally taking notice of how badly the economy of this country skews to the upper echelons, it is important that we understand not only where our tax dollars go, but also how they are paid in, and what creates the income disparity to begin with. This subject is extremely important to the discourse that needs to take place about the massive and continually growing gap between the super rich and everyone else, and it is often so convoluted by those who wish to devolve honest debate into the screaming of buzzwords.

The most important thing about the assessment and collection of taxes are tax brackets. You’ve probably heard of them before, and if you’re currently reading this, it is likely that you exist in the first one. Where you fall in the series of five tax brackets is based on your gross income (less deductions and such), and are divided as such:

Now, most of you probably already know this, especially if you file your own taxes. And you know that it is based on this bracket system that your income tax rate is determined. You’ve no doubt heard a lot about income tax rates in the recent months, and what you know is that with each increasing bracket, the tax rates increase as well, from the first bracket’s rate of 15% to the last one’s at 39.6%. What you’ve also no doubt heard is that this is unfair. Even if the rich do make more money, why shouldn’t we all be taxed at the same rate? How is it fair that they pay over double what the lowest bracket pays on their income? All that this tax scheme is doing is taking more money the harder you work.

It’s not, they don’t, and we do.

What is so often glossed over is how the tax brackets operate. If you make $100,000 a year (falling into the middle of Bracket 3), you don’t get taxed 31% rate on your entire income--the bracket only applies to the money that is taxed in that bracket. Namely, $10,850, or the difference between your $100,000 income and the cut-off point of Bracket 2. The same goes for Bracket 1. No matter how much money you make, the first $37k of your income is only taxed at 15%, then the next couple tens of thousands at 28%, and so on and so forth. It’s a graduated tax system, which means we all get taxed the same amount on the money that we similarly make. The head of BNY Mellon and I pay the same amount of tax on our comparable income, and it is only once he skips upward in the scale that he pays more. And as you climb into the upper reaches of the bracket system, the numbers become neglible.

No, really, look at how the margins shrink as they increase. Between the first two, we see a nine point increase, then as we climb into the realm of upper management and junior executives, the increases shrink to four points each. The final jump, to the world of the top-level execs making a quarter million and infinitely upward, isn’t even a full four points. What the fuck?

The reason most of us are unaware of this issue is that we never get out of that first bracket. Ours, therefore, is a flat tax. No matter how hard you work, unless you’re getting a boatload of overtime, you’re paying in 15% for the rest of your blue-collar life. Unless you are consistently bumping up into Bracket 2, you’ll likely never even consider how the system operates, and you’ll surely never explore the piddling rate at which the upper brackets are taxed and how ridiculously unfair that is. It wasn’t always that way, either. With every new conservative regime that has taken control of our country, the upper rates have shrank and shrank. In the mid-80s, when my good friend Curtis Faith had an income reaching into the top-most bracket, taxes there were around 50%. Before that, they were much higher, as evidenced by the following graph:

As you can see, the rates throughout the “best years” of our country were gargantuanly higher. Not only have those rates shrunk significantly with the increasingly conservative, isolationist approaches government has taken toward our economy, but when the Reagan and Bush tax cuts went into effect three decades ago, we found the lowest tax brackets actually raised and the disparity of wealth increased as the gap in taxation shrank to an all-time low. Now, as economists try to argue for rolling-back the upper-end George W. Bush tax cuts and allow the top bracket to rise to a slightly more reasonable rate, conservatives argue tooth and nail against it, even as the evidence against the economic effectiveness of willy-nilly tax slashing piles up against them.

The reason we need to understand these things is to truly understand what we are fighting for. The Occupy Movement has a great thing going for them, and it is just beginning, but we need to be clear in our message so as to not be spun by those who wish for us to fail. We don’t want to tax people more, we want to tax them progressively. We want to tax them fairly. This discussion about income tax has not even taken into consideration the topic of capital gains taxes—the very bane of the rich and conservative set, which they have repeatedly tried to excise to further benefit themselves. But that, again, is a topic for another post.

To those Occupying, again this is my call: Be strong and be clear. Educate yourself and use that knowledge as a weapon. Be able to answer the questions that will be asked of you, and answer them with passion and with respect. This is how we win this war. We are not an angry mob; we are angry, but we come with purpose. Not to smash windows but to talk. To explain. To feel. And that is all we ask: for someone to listen, to understand and to feel for us as well.


  1. Critique of the Gotha Program (1875)?

  2. I'll take that as a compliment, as I've referenced it here before as well. I'm a big fan, haha.