Monday, November 15, 2010

Eat the Rich! Fun with math.

Big debate on what to do about the expiring Bush tax cuts.  What to do...what to do.

If you listen to those who want it extended, you would think that it will be the end of the world for growth and investment should we make the 'rich' pay what they used to pay.

NPR had a pretty good story on what could be expected if the Obama plan for the Bush Tax cuts were to go into affect.

I will need to assume what I heard is true.  I base this off of the source they used - Clint Stretch - who is Managing Principal, Tax Policy, at a company called Deloitte.

First off, I am not making an argument that it is OK to get more money out of 'rich' people.  I think I could make that argument, but that will be for a different post.

Secondly, no one wants to pay more money for something they don't want to pay money for in the first place.  So it is understandable that people - looking at these tax cuts ending - may get a little on edge.

Thirdly, we got ourselves a crisis here people!  If you don't want a deficit you need more income to pay for the things budgeted for.  Cut! you say.  Cut what? I shout back.  Well cut all them entitlements, all that money that goes to the non-productive members of society.  Cut!  Don't take money from the job makers!

What to do...what to do.

Well, I think looking at the actual burden - in lost dollars for the family - might help with making an argument on who should have the Bush tax cuts extended, and who should maybe...just maybe...stop whining and suck it up for their country.

According to Mr. Stretch - if the Bush tax cuts expired - on an adjusted gross income of:

  • $75,350.00 the increase in taxes would be $2,600.00
  • $325,000.00 the increase in taxes would be $5,400.00

In other words the guy making more than four times the salary will pay twice the taxes.  Now that alone sounds a bit unfair, but lets look at it in relative terms.

A family of four living on $75,350.00 is considered to be in the median, that is, they are the average family in the good ol' USA.  Mom, Dad, Bubba, and Maryjo live on $6279 per month .  From that they buy gas, food, electric, water, healthcare, clothing, lodging, and entertainment.

A family of four living on $325,000,00 is considered 'rich.'  They make up only about 3% of the families in the USA.  Mom, Dad, Geoffry, and Buffy live on $27,083 per month.  From that they buy gas, food, electric, water, healthcare, clothing, lodging, and entertainment. which basically - all things considered - will be the same amount of money spent as was spent by the medium family.  That is, it does not cost 'rich' people more money for the basics, unless they choose to pay more.

This means that the 'rich' family has  $27,083 - $6279 = $20,804 extra dollars to spend on other stuff or to upgrade their standard of living (gold plated shower curtains, 200 pairs of shoes)

The tax burden proposed by Obama for this 'rich' family will be $450.00 per month.  This leaves them with $20,804 - $450.00 = $20,354 extra dollars to spend on other stuff or to upgrade their standard of living. (Buffy could use a Sequined Tie-Waist Gown)

Yes, they just lost $450.00 of income because of Obama.  But they still have three times the amount available to spend than the median family had in total!.  And this amount 'to spend' is AFTER they have purchased all the basic living essentials (this assumes that "basic" is what would be considered "normal" living - as it done by all of us median families).

Another way to look at this, if the Bush tax cuts expired:

  • ($450.00 / $27,083.00) * 100 = 1.66% actual 'tax' on their monthly income.
  • ($216.00 / $6279.00) * 100 = 3.44% actual 'tax' on their monthly income.

Doesn't sound like much, or much of a gap, until you remember that the $216.00 is taken away from what is being used to provide a "basic" standard of living.  The $450.00 for the rich comes out of what really can be called excess money they have available to them.

There is a difference between the median and the 'rich' in terms of money available to spend on 'needs and wants.'  'Needs' cost $6279.00 (and even in that, a lot of it is 'wants').

And the argument that the rich create jobs with that money?  Yeah....maybe, but not as much as the median family who can spend more on 'wants.'

But what about extending them and cutting government services?  Guess who pays the price for that?  Even if government services are cut, the 'rich' family still has $20,354 extra dollars to make up for this, while the median family has had to dig into the $6279 to pay for what they no longer receive.

Wait, so by cutting entitlements and services to keep the Bush tax cuts we are technically passing on additional costs to those who depend on those government services?  And the result of that is an extra cost to these median families?  And that extra cost means less money for them to spend on what they have previously been spending it on?

Wait...isn't that like putting a tax on the middle class?

A small price to pay to stop the $325,000.00 family from having to pay an additional $450.00 per month to bring down the deficit.

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