Saturday, April 10, 2010

Fun With Math

Going to step-by-step explain how this works;

But income tax rates were lowered at every income level. The changes made it relatively easy for families of four making $50,000 to eliminate their income tax liability.

Here's how they did it, according to Deloitte Tax:

The family was entitled to a standard deduction of $11,400 and four personal exemptions of $3,650 apiece, leaving a taxable income of $24,000. The federal income tax on $24,000 is $2,769.

With two children younger than 17, the family qualified for two $1,000 child tax credits. Its Making Work Pay credit was $800 because the parents were married filing jointly.

The $2,800 in credits exceeds the $2,769 in taxes, so the family makes a $31 profit from the federal income tax. That ought to take the sting out of April 15.

Family of 4, 2 children. Total household income, $50,000.

First, figure the taxable income (after deductions). This is the "adjusted gross income".

$50,000 - $11,400 (standard deduction for married filing jointly) - ($3,650 * 4) = $24,000 adjusted gross income.

The $3,650 x 4 is the personal exemption for each member of the household.

The tax on $24,000 of adjusted gross income is $2.769. This is how much the household owes to the federal government before tax credits for 2009. Tax credits are different from deductions, which reduce taxable income. Credits offset the the tax liability dollar for dollar.

For the sake of illustration, let's first assume there is no tax credits involved. The family owes $2,769, however they (1 or both parents) work for a company and taxes are with-held (they receive a W2). Let's say they paid $4,000 over the course of 2009. They owe $2,769 total, but paid $4000. $4,000 - $2,769 = $1,231, which would be the amount the IRS would give them back as a refund.

Now, let's say they are self employed and paid no federal taxes to the government during 2009. They must cut a check to the government for $2,769. $2,769 is the total liability, they paid nothing so far, they owe the whole amount.

Now, let's figure in the tax credits available to them.

They get $1,000 credit for each child, so $2,000 credit. The "Making Work Pay" credit is $800. Therefore, they have a total of $2,800 in tax credits.

Remember, their total 2009 tax liability is $2,769, but have credits of $2,800. Therefore, their tax burden is $2,769 - $2,800 = -$31

If the family works for another company and pays over the course of the year (in my example, $4,000), because their net tax liability is a negative amount for $31, they get back their entire $4,000 + $31 = $4,031. $31 is "free money" from the government, and the $4,000 was their own money.

If the family is self employed and paid nothing to the government during 2009, their net tax liability is a negative amount for $31. They get a check for $31 from the government. It is free money.

Hopefully that makes clear why it is irrelevant whether or not they paid any Federal taxes during the course of 2009. Their total tax liability is a negative $31.

This is federal income tax only. It has nothing to do with FICA, or Social Security. Those are completely different.


Further.. as I demonstrated in the tax bracket survey I did a while back, the median income in the US is around $50k. If I remember correctly, it was $47.5k in 2004, which was the most recent year's data available. Let's just estimate, and I think it would be very close, and say that the "middle class" in America is a household income of $50k. That means that the at least half of all Americans have zero federal tax liability for 2009 if they have 2 kids. Those at exactly $50k would get back a few bucks from the fed in "free money".

The less money you make, the less your net tax liability is, but the credits are still the same. You would receive a greater amount of "free money" from the fed.

This is cash in your pocket for simply having children that qualify for the credit. This is bullshit.

I suppose somebody could file a lawsuit under the Fourteenth Amendment, but I don't know that it would be successful. One could also argue that the progressive nature of the tax brackets violates the Fourteenth as well. If it's okay to have a progressive system, then it must be okay to make financial exceptions for other things as well.

Heck, they could probably give a tax credit for having kids in college, or.. however many dogs you have. The "kid credit" is essentially a moral financial rebate. The idea goes that that having kids contributes to a better society, and therefore to encourage that behavior, the government subsidizes it through tax credits. Using the same logic, they could issue tax credits for.. say.. not getting arrested for domestic violence.. things like that.

In reality, kid credits is simple pandering. The politicians will give a "tax break" to whatever voter block they want to win. In this case, it's the middle income Americans with kids.. which is a very large number of votes.

I am astounded at the percentage of Americans who have no federal tax liability, and I am pissed off that the government actually owes millions of Americans money.. free money.. that they did nothing to earn other than having some kids. In fact, it's basically double dipping. You can take deductions for children to reduce your adjusted gross income, and then you can to do it again in the form of a "tax credit". It's the same kids.. counted twice.. double fucking the rest of the Americans who do not have children.

Low income Americans with no kids may also wind up with free money. If they qualify for the "Make Work Pay" credit of $800, and their federal liability is less than $800, yay.. free money!

I'm a total Liberal, but I think this is bullshit. Everyone who lives and works in America should contribute money (or time/effort) to the federal burden that we all share. For low income people, it should be a small amount.. even if it's symbolic that we're all in this together, and we all do our parts.

Getting free money from the rest of us that are footing the bills is complete bullshit.


Thinking a bit more about the motivation of the kid credit, I think some politicians must have argued that because raising kids costs money, the government could help those families by giving them a tax credit for those children. However, it's not the "government" helping those people. It's people like me helping those people, and nobody asked me if I wanted to.

If you follow the math, strictly, this is a transfer of monies from median income childless Americans, as well as wealthier Americans with kids, to those making the median and below, but have kids.

I am directly subsidizing somebody else's kids.. They chose to have those kids, and they earn the money they earn, and somehow it makes sense that I am required to pay for those kids. And don't even get me started on school taxes again.

The system could be much more simplified.. stripping out all deductions and credits. Take the gross income (plus capital gains), multiply it by a progressive scale, and that's your tax liability. If you're poor, it's smaller. if you make a lot of money, it's larger. If you have kids, it doesn't make any difference.. you chose to do that, and it's your responsibility, not mine.

But that would make too much sense


Dan said...

Definitely makes more sense. Thanks for that.

I still don't get the deal you have with school funding, especially in regard to income tax. Most school funding is based on property tax iirc. Unless you are talking about school funding in general.

Tom said...

I most be a horrible writer because I'm apparently clear as mud over and over. I guess I didn't draw a plain enough line in the sand when shifting from federal child tax credits and deductions, to school taxes.

I'm pissed off that my federal tax burden is more than other people's tax burden simply because they have kids. I'm pissed off that they are now getting to double dip the tax incentive of having kids.

I don't give a fuck if it costs a lot of money to raise kids, the tax liability should be the same for the same income whether you have kids or not.

Yes, I know that public schools are funded via property taxes. We pay a lot of money in school taxes - and we have no kids in the schools. John owns a number of residential properties, and he rents them out. He gets sacked again and again and again with school taxes.

This is bullshit. Public schools should be paid for by the people who send their kids to the public schools. Not by the rest of us.

I don't mind paying property taxes in order to support things like polic and fire fighters. There's lots and lots of common services that are provided to all home owners regardless of circumstances, and I'm even okay that the property tax is progressive.. i.e., the more expensive the home, the more the property tax is.. even though the services provided by the city are the same regardless of home values.

I'm pissed off that other people get discounts on their tax liability in any circumstance when it is their breeding that is the determining factor. It doesn't matter if it's income taxes or property taxes. It's bullshit any way you look at it, and I think I'm going to start going to city council meetings to protest.

There is no legitimate reason why I should be paying for somebody else's kids either through federal income taxes or property taxes.

Dan said...

I can see how having a generally uneducated populace would benefit you and John specifically perhaps (you work for the VA,which would presumably see further use as enrollment in the armed forces goes up and John sells foreclosed realty, so people making bad financial decisions benefits him indirectly), but I can't figure out why you think educating children has no benefit to society as a whole. Public healthcare=great. Public education=terrible? What about all those countries with free public education we admire so much?

I understand your point perfectly, I simply don't understand why you can't see that an educated populace is better for everyone, not just those educated.