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Quick Study: Taxes, Taxes, Taxes
Monday, March 23, 2009
By: Brian Mockenhaupt
Hard times mean a hard look at taxes--how much we pay, who skates through loopholes and more. Learn about the impact on your return.
From Reader's Digest
- Who takes the hit? Candidate Obama pledged to shift more of the tax burden to the richest Americans, in part by reversing President Bush's tax cuts. His plan targeted those earning more than $250,000; everyone else would get a tax cut. But the recession intervened, putting the tax hike for the wealthy temporarily on hold and changing the discussion to which tax structure will help us get out of a giant economic rut. Research by one of President Obama's own advisers estimated that every dollar in tax cuts equals $3 in economic growth. For now, most people with an income below $500,000 are likely to get at least a small tax cut.
- More middle-class families walloped by the alternative minimum tax (AMT) In 1969, Congress closed a loophole that had allowed 155 very rich households to hide most of their income in tax shelters. But the resulting AMT didn't adjust for salary inflation; today, it can affect families making less than $100,000. Getting rid of what amounts to a legislative goof should be easy. It's not, says James Horney of the Center on Budget and Policy Priorities, because the government has counted future AMT revenue on its books: "Absent tax reform, getting rid of the AMT is very expensive." Every year, Congress ends up passing a "patch." For 2008, you're probably safe if you make less than $200,000.
- More sales taxes With an eye on the $3 billion that could be siphoned from currently tax-free online sales, New York State recently drew ire by taxing items shipped there by amazon.com. As strapped states look to sales taxes to help plug shortfalls, expect concerns about the uneven impact of such "regressive" taxes: "People with lower incomes have to spend most of it to stay alive. People who bring in $10 million a year don't spend $10 million," Lee Farris, of United for a Fair Economy, has said.
Where the Money Comes From
How the cash flows into Uncle Sam's coffers.
For 2007
Individual income taxes: 50.4%
Payroll taxes (FICA): 31.4%
Business income taxes: 14.6%
Excise and other taxes (tobacco, gas, etc.): 3.6%
Total tax revenue for 2007 = $2,709,798,000,000
One Family's Burden
How much a typical family in Philadelphia earning $50,000 paid the tax man in 2007.
Federal taxes: $6,007 (41%)
Sales tax: $803 (5%)
Property tax: $4,235 (29%)
State/local income tax: $3,361 (23%)
Auto tax: $231 (2%)
Total = $14,637 or 29.3% of income
The Back-and-Forth …
... On Taxing the Rich
"You can't tax the rich and give it to the poor and produce a fair economic system."
--Brent Littlefield, spokesman for the American Conservative Union
"President Obama should take half of our huge earnings in taxes instead of the current one third. Higher taxes on huge paydays can finance opportunity for the next generation of Americans."
--Reed Hastings, chairman of Netflix
... On Inheritance Taxes
"They tax you when you earn a dollar, they tax you when you save it, they tax you when you invest it. If you earn a dividend, they tax it again, and if you're stupid enough to die, they steal up to half."
--Grover Norquist, president of Americans for Tax Reform
"You could take that $30 billion and give $1,000 to 30 million poor families."
--Warren Buffett, on the Republican proposal to eliminate elements of the inheritance tax, which raises some $30 billion a year from the assets of about 12,000 rich families
Forward Thinking
- Cash back - A centerpiece of President Obama's $789 billion stimulus plan provides $400 tax credits for middle- and lower-income workers. The goal is to direct the break to those cash-strapped enough to turn right around and spend it. But since these credits are being given to people who earn so little that they don't currently pay income taxes, expect partisan wrangling over whether tax policy is being used as a back door to "welfare." The president also plans business tax cuts for creating jobs, though conservatives want more help in this area, such as lowering the corporate tax rate from 35 percent to 25 percent. "President Obama is a more international guy, so we should be close to the European average [of 25 percent]," quips Grover Norquist of Americans for Tax Reform.
- Simplify - Americans currently spend over $20 billion annually on software, accountants, and other ways to navigate the 4,333-page tax code. One idea popularized by presidential candidate Mike Huckabee would toss out the book (literally), getting rid of the IRS and replacing income taxes with a 23 percent national sales tax. Under this "Fair Tax," the Philadelphia family earning $50,000 would get a $5,612 rebate; their total tax bill would range from $8,600 to $12,500, depending on their spending.
- Debt management - Since 2000, government revenues have fallen and spending has risen. Future deficits will run over $1 trillion annually. Where's the tipping point? Worst-case scenario, says Len Burman, director of the Tax Policy Center: "In ten years, we can't pay our debt back at all without printing a whole lot of money." Better scenario: "In three or four years, when the economy is doing well again, we take measures to get the budget under control."
The Time Line
1765
The Stamp Act. British Parliament's tax against the American Colonies draws cries of tyranny.
1794
Gulp! President George Washington sends federal troops to Pennsylvania to suppress farmers rebelling against a whiskey tax.
1817-1861
Tax-free days!
1913
16th Amendment establishes income tax.
1917-1918
World War I spawns an enormous tax increase.
1935
During the Great Depression, the Social Security Act levies a 1% tax on the first $3,000 of earnings.
1941-1945
Tax hikes swell federal receipts from $8.7 billion to $45.2 billion.
1981-1988
Reagan's tax reforms (codename: Trickle Down) reduce the top tax bracket from 69% to 28%.
1989
"Only the little people pay taxes": hotel heiress Leona Helmsley's tax evasion trial.
1990
Read his lips now: President George H. W. Bush raises taxes.
2000
Presidential candidate Steve Forbes bases entire campaign on championing a 17% flat tax, just as he did in 1996.
2001-2003
President George W. Bush's cuts trim the top tax rate by 4.6%, the middle rate by 3%.
2009
While 138 million returns are filed, Congress rewrites the tax code via the stimulus bill and the president launches recovery.gov to show "how and where tax dollars are spent."
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