I always tell my students that the best way to learn about American public policy is to do their own taxes every year.
Filling out your own tax forms shows you what our society’s priorities are and precisely how your personal income is going to fund it. If you don’t pay attention to those debates, the people who do — and their lobbyists — will be more than happy to rewrite those laws to their benefit and your detriment.
If you’re interested in justice, or just getting your fair share of deductions, take your federal 1040EZ or 1040A forms and follow me as we plunge into the fascinating world of federal fiscal policy.
One of the first things you notice is that federal income tax rates are progressive — wealthy individuals pay a greater proportion of their income in tax than poor people do. In 2008, the first $8,950 a single adult taxpayer earns is non-taxable. Above that, you pay taxes at steadily increasing rates as your income increases. Currently, the lowest tax bracket is 10 percent and the highest is 35 percent.
One major effect of President George W. Bush’s tax cuts was to cut rates. Until 2001, federal income tax brackets ranged from 15 percent to 39 percent. After that, all taxpayers saw declines in their tax rates. In 2002, I saved $338.
Thanks, George. I’ll buy you an O’Doul’s the next time I’m in Dallas.
Or maybe he should buy me dinner – because not only did the rate cuts benefit the wealthy, but his other tax policies also helped individuals who needed it least.
Tax brackets are only the straightforward half of the story. The other half is a tangled thicket of provisions collectively known as tax expenditures. Once you hire a jungle guide or an accountant to take a machete to the torturous language, you’ll find a bunch of goodies that let you pay fewer taxes. Three of the most common goodies are deductions, exemptions and tax credits.
In general, deductions and exemptions allow you to reduce the amount of your income that is subject to tax, while credits directly reduce the tax you owe.
Collectively, these tax expenditures reduced federal revenues by $800 billion last fiscal year, according to the Tax Policy Center.
Guess what? That $800 billion disproportionately goes to the wealthy.
Perhaps the most egregious example is the Bush-era cuts on dividends and other capital gains. Since few Americans directly own stock, generally only people in the top one tenth of one percent of tax payers have to worry about dividends. In 2005, Political Scientist Larry Bartels noted that taxpayers earning $1 million or more a year paid more than half of the tax on dividends. Yet Bush’s cuts on dividend taxes and capital gains in combination with previously existing deductions cost $48.6 billion a year.
In 2003, Investor Warren Buffett noted that Bush’s changes would have left him paying three percent of his income in taxes, in comparison to his secretary, who paid 30 percent of her income.
That thump you just heard was the increasing tax burden and cuts in government services falling on the median-income household, which only makes about $46,000 a year.
But it gets worse.
The top three deductions, according to the Tax Policy Center, are employer-provided health-insurance, contributions to 401k and traditional Individual Retirement Account plans and deductions on home interest.
If you don’t have health insurance, can’t afford to contribute to a retirement plan and can’t afford to buy your own home, you don’t see a dime in benefits from these programs, which cost the Treasury Department roughly $300 billion last year.
Now, one can argue that some of these programs help middle and low-income people to buy their own home or save for retirement. That’s true, but because of high or non-existent caps on the benefit, they tend to provide much greater benefits to a Manhattan banker writing off interest payments on his $5 million townhouse than a Detroit family who just purchased a $55,000 home.
Worse still, most of these programs are only deductions or non-refundable tax credits, which means that only individuals who would otherwise have scads of taxable income can take advantage of them. If I only earn $20,000 a year, I can only take $20,000 in deductions, while if I earn $200,000, I can take $200,000 in deductions. One notably progressive exception to this rule is the Earned-Income Tax Credit, which allows low-income taxpayers to get money back beyond their tax liability.
So the next time you have the opportunity to do your taxes, take it. Wading through those deductions lines and instructions might seem like a frustrating waste of time, but it’s worth it to gain an understanding of who benefits from U.S. fiscal policy.
Patrick O’Mahen can be reached at email@example.com.