There has been a lot of talk the past eight years about “income inequality,” a term which means that some people in our society have excessive amounts of money while others struggle to meet their needs. While that may be true, instead of thinking about creative ways to attack this complicated problem, the liberal left, Robin Hood-like, zeroes in on something called “income redistribution.” In other words, the solution is higher taxes on big earners and corporations in order to transfer that money to low income people via expanded welfare.
Many Americans receive such welfare in the form of food stamps, Medicaid, and Section 8 housing. Given this reality, the question I want to discuss here is, does it really pay to work for a living and shell out for taxes, or is it better to just live on the dole?
I bet I’ve upset some of you already. How can I even suggest that people take welfare? What happened to self-reliance and pride? Yes, the question upsets me, too, as it goes against my work ethic. But I did not write tax law, so let’s examine the tax rules and how they affect both rich and poor.
Paying One’s Fair Share
The president of the United States has often accused corporations and “the rich” of not paying their “fair share.” Hillary Clinton, too, said, “We are going to have the wealthy pay their fair share. We’re going to have corporations make a contribution greater than they are now.” (Greater “contributions” is of course a euphemism for raising taxes. And obviously, if you raise taxes on General Mills and Proctor and Gamble, the buyers of Cheerios and Tide are paying it.)
So what do Obama and Clinton mean by fair share, given that these companies follow the tax laws and pay everything the law demands? (They also pay the highest corporate tax rate in the world.) Two professors of accounting recently wrote that the term “fair share” has no meaning. They therefore suggest that perhaps a line should be added to a tax return. On that line, those who feel they paid too much should be allowed to reduce the amount to what they think is fair, while those who feel they should be paying more could add money to increase their tax bill and make it fair. Clearly, this new jargon of “fair share” must be explicated further. Does it apply only to the rich? Let’s find out about fair share by using examples from our own community.
Life Is Not Cheap
First of all, a generality: Taxes are high. A typical family with two children and $100,000 in income will owe $22,000 in taxes. Add to that tuition, which is a small fortune, and they are barely getting by. Moreover, as income rises, taxes rise significantly as well, to over $55,000 on an income of $200,000. This is a significant bite, especially since, unfortunately, people’s expenses usually grow to meet their income. With these sums in mind, consider these families.
Case Number One
The first family has three children. Dad is self-employed and earns $25,000 after his accountant deducts relevant expenses, like car, home office, internet, cell phone fees, etc. How much tax will he owe? The answer is none. In fact, the government will actually give him money. Yes folks, he gets a refund even though he paid no taxes! It’s called the earned income credit, and it is like a retail store giving change to customers who are window shopping. How much? He would get back $7,178!
Now, let’s say that the following year he makes $50,000. How much tax will he owe on the extra $25,000? The answer is $4,974. Plus, he will lose that nice “refund” of over $7,000. That means he is effectively paying $12,152 tax on that extra $25,000, a total of 48.6%. Yes, the government takes almost half of the extra amount this Dad made. But we are not done yet. This couple will also lose much of their Maryland Homeowners tax credit. This credit’s formula increases your taxes by 9% of your earnings. That brings the total tax on the extra $25,000 to 57.6%. So far, this man’s “fair share” of taxes on the second $25,000 is $14,400. He gets to keep only $10,600 of his extra earnings.
Scary? Yes, but we are still not done. There is also welfare. What if this family loses $500 per month in food stamps alone as a result of their higher earnings? That is $6,000 per year, or an additional 24%. Their tax rate is now over 81%. Bottom line: They keep only $4,600 out of the $25,000 extra income they earned.
Are we done yet? Are there any more costs to consider? Well, yes. It is quite possible that the family’s health costs will go up. Because health insurance costs are linked to tax laws and taxable income, they might lose some of their free health insurance. They might have to pay some deductibles and co-pays. They might also lose energy assistance from BGE. Yes, this family might end up in the 90%-plus tax bracket!!
Folks, let’s put aside our philosophy of working and just crunch the numbers. Does it pay for Dad to work much harder to earn the extra $25,000 to take home under $3,000? It doesn’t seem so. The only satisfaction this family might possibly have is in knowing that at least they paid their “fair share.”
Case Number Two
This Dad makes $100,000. With five children, he receives an Obamacare health insurance credit of $500 per month, and pays a premium of $1,000 per month. It feels tight, so Mom decides to work and earns $30,000 by babysitting a lot. It turns out they will owe $15,380 of that amount in taxes. Fifty-one percent of her earnings will go to the government! That is just taxes – before any government welfare/handout considerations. Should she put herself under pressure and neglect her home and children for that?
Case Number Three
Dad earns $160,000, and two of the children are in college. This Mom also starts to babysit and brings in $20,000 on the side. Because they file jointly as a married couple, her income is taxed according to her husband’s high tax bracket. The government therefore takes $13,996 of her earnings in taxes. That is a rate of 70%. Yes, 70% is “fair.” Does it make any sense for Mom to babysit and come home with $6,000 out of $20,000?
Another scenario that emerges from the tax system is what I call The Trap. Often a young couple will start off with one spouse working and one in school, and they qualify for government programs. When the second spouse enters the workforce, however, their effective tax rate is enormous. At that point it hardly pays to work. When you build welfare into the tax system, you create tax rates that are literally grotesque.
Do you think that our tax system encourages honesty? Do you think that all the cleaning ladies, lawn cutters, and construction workers report their entire income because they are ethical? People who have the potential to push their income over $100,000 will do so, but for the rank and file, the system is an invitation to hide income. Low-income workers and immigrants quickly realize that earning money off the books can make them a fortune. They figure out that they can report just $20,000 of their $40,000 in earnings and take advantage of welfare benefits.
And what if the employer is in on it, too? He pays worker A $40,000 but quickly understands that he could just as easily pay worker A $20,000 and pay the other $20,000 to A’s brother, B, who is entirely self-employed. Now both A and B can show that they earn only $20,000 each and are thus eligible for a slew of benefits. The employer is benefiting as well, since he can pay less than the market rate and has a happy employee who is not asking for a raise. The loser is the government, which is shelling out a fortune in undeserved welfare. Do you really think that immigrants have not figured this out? How would the government ever know?
Perhaps there is something more nefarious is going on here as well. Why have I never heard politicians talk about making cleaning ladies pay their fair share? Does the IRS ever send auditors to the people with lawn mowers in their pickup trucks and ask to see their W2s and tax payments? Does the government ever go out to the day laborers sitting next to Home Depot to check on their income tax payments?
Obviously, there is an underground economy that no one talks about in presidential debates. Why not? Whom does our present system benefit politically? Let’s start with the fact that a large percentage of the populace pays no taxes at all. In addition, anyone with children and a low income receives the earned income credit. Therefore, the call by politicians to legalize illegal aliens so they can to pay taxes is disingenuous. These immigrants would not be paying anything into the system but would, instead, be getting back many thousands of dollars from the government.
The legislators who pass these laws gain by having a built-in majority that votes them in again and again. Why wouldn’t welfare recipients vote overwhelmingly for the party that gives them free money? All the while, the leftist lackeys in the media keep demanding that the rich pay their “fair share” while not discussing the poor, who are hiding income. An inevitable conclusion is that low-earners are engaged in not paying their fair share much more so than are the rich (who are subject to audits and must take care to submit legitimate tax forms). This reality throws most of the burden onto middle class employees, who work as computer programmers and other jobs that are paid legitimately. They have no way to increase their income by gaming the tax system.
Once upon a time, people were embarrassed to take hand-outs. They looked upon a soup line as an absolute last resort. However, when people get an “independence card” (electronic food stamps) from the government, their attitude changes. No one is embarrassed to swipe a “credit card” that just happens to get “recharged” each month. They feel entitled to it.
How sad that this great nation, founded on democracy and equality, is now engaged in the largest vote-buying scheme in the history of the world.
Eli Pollock, CPA, can be reached at email@example.com.