Why Now?
Tuesday, May 03, 2005
  A Taxing Question
In response to several people giving their opinion of the annual income it takes to define the "Middle Class", Kevin Hayden at The American Street posted the median income of a family of four in the US by state. The median income of a family of four in the country as a whole is $65,093.00. The Department of Health and Human Services uses $18,850.00 as the poverty threshold for a family of four.

As I still haven't filed the instructions for my 2004 taxes, I decided to calculate the income taxes for a family of four making the median income using the standard deductions. The standard deduction [$9,700] plus the four personal deductions [$3,100/person] yields a $22,100 reduction in taxable income, bringing it down to $42,993 which has a income tax liability of $5,731 [from the table]. Now this family still had to pay at least at 6.2% tax bill for Social Security, but I'm interested in the income tax side.

The actual income tax rate on this median income family is 8.8%

The reason I'm limiting my interest to income tax is because of a post by Steve Bates at the Yellow Doggerel Democrat on yet another "flat tax" proposal. This one involves a 30% value-added-tax, which is essentially a sales tax.

If you buy a car that was priced at $20,000 in Florida you would pay $1,200 in state sales taxes. If the VAT is used that $20,000 car is now $26,000 and you would pay $1,560 in state sales taxes. The way the VAT and state sales taxes are calculated you will be paying taxes on taxes.

What this leads to is the reality that the median income family experiences a tax increase if they spend $20,000 of their $65,093 annual income on taxed items. Under the current system a family of four has to make more than the $22,100 standard deductions before they pay any Federal income tax, but under a VAT they would be paying a 30% tax on everything they buy.

The people proposing the plan keep talking about simplicity, but they start talking about exemptions and other gimmicks when the reality is pointed out. In the end Congress would be playing with exemptions before the ink had dried on the bill, and the savings they talk about achiving from eliminating the IRS would be the result of pushing the government's tax collecting process down to businesses.

If Congress wanted to simplify the tax code all they would have to do is eliminate all deductions other than the standard deduction and the individual deduction. The whole tax form would look like the 1040EZ. They don't want to do that because they gain power by having people pay them to include special deductions.


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