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 …