The U.S. has had similar tax rates before in our history. Interestingly enough, those times were the times when the middle class was thriving. So that basically throws out your reasoning, which, by the way, is flawed and one-sided. The inequality in wealth is staggering right now, and we need to tax the ultra rich to make life a little more comfortable for the regular and poor people. Progressive taxation is the way to go!

You’ve created quite the straw man there. You are presuming that “Tom” is self-employed (if he is not, then his employer will pay half of the 15.3% social services tax for now and Tom won’t pay until he is retired and in a lower income bracket), AND you are using his *Marginal* tax rate as if it is his average tax rate, which is really somewhere between 17% & 20% (look at the figures in Mudry & Parisi (2005), Individual Income Taxes & Rates, 2003, Statistics of Income Bulletin), AND you are assuming that he is in the highest state taxed state (the Tax Foundation gives average rates for state AND local tax combined and says that the US average in 2007 was 10.10%, so use that, but that includes local tax, which your calculation didn’t. Even using the highest estimate of average tax, that’s still under 38%–a far cry from 64%.

The arguments you supply are standard supply-side economics (as taught in Econ 101), which has largely guided government policy since Reagen. It doesn’t address the issue of the hole that we have dug ourselves into and how we are going to get out.

First off, I don’t think any of the candidates plan to remove the cap on Social Security taxation, though Obama and Clinton have debated about how much to raise it. But, I wonder, wouldn’t doing so be just? Consider: a schlub like me, who makes less than the current cap ($102,000 for 1008) pays 7.65% for Social Security AND Medicare (my employer pays the other half). However, if I made $1,000,000, I would pay the maximum of $6,324. In other words, I would pay .6% (that’s 6 tenths of one percent) of my income into social security and Medicare.

But what about the 15.3% rate that Casey discusses? Well, self-employed people do have to pay this rate. BUT, they also get two tax breaks that effectively reduce their payment to the same 7.65% that non-self employed people make (see the Social Security Administration website for details about this).

Here’s the kicker. Low-income and middle-class workers pay 7.65% of their wages into Social Security/Medicare. The wealthy pay increasingly smaller amounts. Is this just? I don’t think so, but I won’t argue the issue. As a philosopher, I know that we can go around and around and around about issues of justice. I’ll defend a Rawlsian viewpoint, Casey will argue a Nozickean viewpoint, and we’ll end up going nowhere. So, let’s talk pragmatics. Alexis de Tocqueville recognized that one of the greatest threats to democracies occurs when wealth distributions become too great and the lower classes begin to feel like the game is rigged against them. This very same sentiment was echoed by a well-known libertarian in front of Congress right after he stepped down from being the chair of the Federal Reserve–I speak, of course, of Alan Greenspan. So, argue with me until you’re blue in the face about issues of justice. I’m more concerned about whether the increasing wealth inequalities portend greater future political instability. Is this what we want?

I think what we all need to understand here is that more and higher taxes are not good for the economy. This is Casey’s point.

What you are failing to understand it that the social security tax 15.3% (7.65% for employee & 7.65% for employer) is a much bigger burden on the poor and middle class. And when you say that the employer pays 1/2 half of the social security tax you fail to realize that this is 7.65% of a poor persons salary that is not paid to them. I know, I know but what about their retirement. Trust me – social security doesn’t cut it. Talk to anyone who lives on social security, and ask them what their life is like = not good.

Socialism is not the answer, it has never worked on this planet and never will. Societies that enter into this practice are doomed to failure.

Ron Paul one of our only true friends in Washington has some really good things to say: http://www.ronpaul2008.com/issues/debt-and-taxes/

from Kim: “Interestingly enough, those times were the times when the middle class was thriving. So that basically throws out your reasoning,”

How does that even address his reasoning? There is no reasoning in your assertion. You state a very broad and dubious correlation and think that throws out his reasoning? I’d like to hear you actually address his point with reasoning of your own. If a “rich guy” or “big bad corporation” pays more in taxes, what happens? Do they or do they not find a way to reduce their costs to counter it? Is the result good or bad? How does the “poor schlub” who works for him benefit? Because the government takes the money and gives him a fraction of it in the form of some giveaway or entitlement? Because the government knows better how to use that money than the guy who earned it? Because the government is better when it has more money to spend?
Those are all very suspect assumptions. The kicker is that the governments revenues increase more after tax cuts. That’s not really disputable anymore.
So where is the “reasoning” for more progressive and higher taxation? And can you please try to actually address the reasoning in the post? You assert that “Progressive taxation is the way to go!” You are right if where you want us to go is slouching toward socialism and stagnation.

What the hell does this have to do with budgeting software?

@rouftop – nothing at all!

I have really enjoyed watching the dialog that has ensued after posting this entry. Six people have responded, which must be close to the entire readership of my new blog :-). At this point I feel like I need to respond to some of the things that have been said and clarify what I was trying to say. Please read through the entire comment because each part will address different things that have been said.

Before I make any other point I want to say this: The entire purpose of this article was to describe how taxes (on anyone) hurt the poor. It wasn’t about the rich, it was about the misunderstanding that is prevalent that you can tax one group and not have effect another. Many responses focused on why the rich do or do not deserve to be taxed more in order to help the little guy. That misses the point entirely. I was talking about how to help the little guy! However, I did get distracted at one point by the exorbitant rates that exist when you add them all up. Now, I will get on to more direct responses to comments that were made.

First, “What the ____ does this have to do with budgeting software?” It may not have a lot to do with the software, but I think that it has a whole lot to do with budgeting. The heart of budgeting is deciding what you are going to do with your money. It is taking control of your own finances. The point of this post is that we are about to give control of a part (often a significant part) of our budget to someone this November. As we make that choice we have to realize that we may be giving up some of the money that we currently count on to meet our goals and needs. That is a critical budgeting decision. The scariest part of it to me is that our neighbors may decide to give up that part of our budget for us, whether we like it or not! Like it or not, this election will very likely effect your budget – how much of an effect is what is to be determined.

Second, I was not writing about progressive taxation at all. I was discussing the effects of increasing taxes. I did use the top marginal tax rates as a side note to bring to light how high they really are. The point of the article is that when we think that we are increasing taxes on only one group, those taxes will actually have an effect on everyone, and often the greatest effect ends up being on the lowest man on the totem pole. In a way it is like the animals of prey being the most effected by pesticides, even though they never came in direct contact with them. However, since the marginal rate seems to have been a focal point I will share some thoughts on that as well.
Third, here is a question to ponder. Why has the gap between the wealthy and the poor historically increased even though we have increased our progressive tax rates? Aren’t those rates designed to decrease the gap? Or does it, in the end, hurt everyone – especially those who have the least room, financially, to be hurt?

Fourth, I use the marginal tax rates for a reason. That is the rate that effects any new decision. If “Tom” wants to increase or decrease the amount of business he does, those are the rates that will be in force on those dollars and thus will be the ones that affect his decision.

Fifth, “Tom” represents real clients that I work with. You may question whether a rich person really makes decision about earning more money based on their marginal tax rate. I can tell you that I have had clients in my office literally deciding whether or not to take a promotion or start (or expand) a business based on the percentage of the new money that will actually be theirs to keep, after taxes.

Sixth, I use California in the example because I live here, because 10% of the nation lives here, because more than 10% of the nations’ “rich,” and because the CA tax rate is a prime example of what I am describing. As a side note, California right now is in a budget crisis even though they have an exorbitant tax rate that is much more progressive and aggressive than the Fed, proportionately. Also, the “rich” and large businesses are fleeing the state in record numbers.

Seventh, the “justice” and “fairness” in the “rich” having a cap on the social security tax is that they also have a cap on the benefit that they will receive. If one cap is taken away, the other should follow suit, in order to be truly “fair.”

Eighth, I too am concerned about the increasing wealth inequalities in our nation. However, my concern is only for the lower portion of that equation. I have no problem with some being “ultra-rich” (just as some are ultra-beautiful, ultra-talented or even ultra-good parents). My desire is to see those who are at the bottom in a better situation. I believe that they will be helped the most by lower tax rates because the strengthening of the economy and of the pocket book of the rich has the greatest effect on the not-so-rich. Do the rich lose their jobs when the economy goes south, or all of a sudden find more CEO-type positions when it goes up? Not really. The greatest effect of economic swings is on the hourly jobs that are or are no longer available. And we have well proven over time that tax rate changes effect the economy.

Well, so much on that for now. A new post is about to come out on a totally different topic. Thank you for all of the discussion! I think it is exciting and fun to read what people have to say, and to see how they react to what I say.

Why does it seem so many people are willing to shoot themselves in the foot when it comes to the issue of taxes by supporting politicians that clearly don’t understand basic economics? Because these politicians clearly understand human nature and motivations; goodwill towards men and sense of purpose? Not quite. See this study “Are People Willing to Pay to Reduce Others’ Incomes?” The short answer is yes.

Tax increases effect everyone – RNC 2008 Highlights…

“This paper reviews the evidence…of the corporate income tax, especially…on the relationship between the corporate income tax and wages. While further research is necessary to draw definitive conclusions, these studies suggest that labor may bear …

kim – Wow.. Take Take Take. what gives you the right to take from anyone? As one human being to another, what right do I have to your efforts or benefits to your efforts. You want more? Its not the governments responsibility to make sure you get it. Its our nations responsibility to make sure you have the OPPORTUNITY to peruse the lifestyle you feel you want… If you want more, do more, think smarter, work smarter, be better. If you feel your tired and its not worth staying up late, sacrificing a bit now to have a better future for yourself, than thats fine… you should have less and get less. Risk less? get less. If someone has put it all out on the line, done their homework, put up with idiots telling them starting a business wouldn’t work or is crazy, too much effort or risk, then they should get more.

When you were in college(I can tell you were because of your mindset.. yes I went there) and went to class(because you cared), did your homework, stayed up late, joined study groups, crammed for that quiz and midterms/finals…all while other people slept in, went to parties, headed out to the beach, and just plain did whatever they wanted because they didn’t care about doing something for their future… what grade did you get? an “A”? what grade did the other slacker get? C, D, F? Using your thought process we should take from your grade A… move you down two steps to a “B-” and take slackie up a few steps to a “B-”. becuase using your words”Progressive taxation is the way to go” think of this as Progressive Grad Taxation. “we all do better when we spread the wealth around” – from our president. whatever. If you all want to go to the beach cause you don’t care, move to china where they’ll take care of you. That thought process is seriously eating away at the foundation of America. Go travel and ask countries how socialism is. hows their health care? Because my wife is a independent consultant – we pay for our insurance, we don’t need a company to do it, or our government.

Wow.. quite a rant. My apologies. I’m just fed up with people taking what their not entitled to. Want more, go get it yourself, stop taking from someone who actually did something. If I make less than you can I have some of your money this year?

And yes, typos a plenty. 8) thank you

I had plans to finally use my talents and abilities to get rich this year. We are all responsible for our pursuits, it’s a matter of “How badly do you want to get your something”. All the whining and moaning about inequity – rich people are rich because that is their life pursuit or inheritance, if you’re gonna “make it” then America is still the best place I know. Think of how many people who barely speak the language own hotels and convenience stores. Taxing established rich people makes established rich people move to Switzerland. I just wish I’d started before they decided to up the taxes.

America is not on the top happiest countries list!!!!! so much for the work hard ethic. I believe the poor work far harder than the rich. Cause the poor dont have the money to go to school or improve themselves. I shouldnt say the poor i should say the lower middle class. to survive you have to work two jobs to survive for many people and even that is not enough for some just to survive!! not thrive!!!!. The idea that you get to decide how much you want by how hard you are willing to work is ridiculous. The rich may work hard but they do it in a plush office, secretaries, limos, vacations.
The happiest countries according to survey are those that have a more socialist government. Finland, sweden, ireland, netherlands. If you cut taxes and allow the wealthy to control the money they will create more 8$ an hour jobs. who needs that misery!!!!. I say dont allow people’s businesses to grow cause all they are going to do is hire people for a poverty wage. corporate america is way to big and way to irresponsible i say split them up and give other people a chance to go into business. I am no economist or grammar genius, but if you want to read a good book about economics read ” Small is beautiful” be e.f. schumacher. by the way i talked to somone who remembers Carter and what life was like back in the Carter days and he was getting paid a livable wage and when Reagan came in they cut his hours and the pay went from $20 to $8 i dont think Reagan’s way works it has been a disaster more regulation of the corporations more taxes for the corporations enough of this limited liability crap.

Theodore – Wow again.. you and Kim should hang out and go to China where you can contribute to a society you agree with.

Americans do work hard(compared to what?) 8 whole hours 5 days a week… Wow. My uncle started a business from scratch. for over ten years he work 8am took a lunch and dinner break, and was 75% of the time at the factory/office till after 1am. Thats working harder. After that he bought his own small plane, was able to take his family on many trips for long periods of time, pay for college for all of his children and set his wife up for life(which he passed away 15 year later). He employed many people who were thankful for a job that provided a lifestyle that they were content with. All had their ideas of how he ran the company wrong and when I worked with them, I told them to go start their own and put him out of business with their ideas. None did. To my co-workers it wasn’t worth the effort or risk.

It sounds like you know how to run/ruin) a business.. maybe you should create your company who treats their employees better… pay them $40/hour to run the cash register/ mix the product/ answer phones. oh… you did and now your out of business? you had to lay off all the employees? how mean of you to not employ them any more. Who cares if you don’t have the profit or money to pay them. that’s not their problem.

Please Please Please MOVE to China (Happy Socialist Society) and post something here 20 years later. I’d LOVE TO READ IT.

I’m not a big fan of HUGE corporate America, but they were small businesses that were owned by someone who, grew and grew. “I can’t compete with Corporate America” – I can hear the words spilling out of your mouth now. Tell that to Mark Zucherberg. in 2004 he was broke, now he’s the 321st most wealthy person in the us…. he’s also the youngest billionaire. He’s lucky… whatever. He dropped out of Harvard and decided to go it on his own. no college education.

Reagan – now tell me know many people where employed because of what he did. Almost everyone had income. very few sat at home and collected a welfare check because of a lack of a job.

Finland, Sweden, Ireland, Netherlands… happy. WOW. I know people from two of them…. Not happy. Lazily content maybe. all living a life of quiet desperation. Gas at 4 times was ours is… 60% tax rate… And you better pray that you get hit by a bus when its time for you to leave this earth, because you definitely don’t want to deal with their health care.

Feel free to respond to this, I check this once every year or two. lol

I think congress and the current administration needs YNAB…. Or start listening to Ron Paul!

Sorry, I meant YNAB Pro.

Herb – you seem to have a good handle on things and my guess is that you are too smart to run for office. Well put arguments based on solid theory and economic observations.

Angie – I could not agree with you more. Let’s live out of last month’s national income rather than the next generations.

In the haunting words of Thomas Jefferson:
“If the American people ever allow private banks to control issue of their currency, first by inflation, then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

And who controls our money today? The Fed you say and you would be correct. But the Fed is private, not part of the government.

Art – Thanks for figuring out what my irate babel meant. I’m sick of lazy people blaming everyone else for their lack of what they think they should have.

Try a little elbow grease and get back to me.. Success is on the other side of failure from where you are, not in the opposite direction. You’re gonna need to go through it to get to where you want to be.

Take care all… see ya in another 6 months for another rant.