Upper, Lower and Middle Class Tax Breaks
August 19, 2009 · Print This Article
Many people feel that rich people don’t pay enough taxes. The question of what type of tax structure is best for the economy isn’t something I want to address in this post. Instead, I’d like to talk about the idea that rich people pay less in taxes than the poor and middle class.
Part of this view is rooted in what people see as the purpose of taxes. I see the government as providing a very valuable service to me. They keep the infrastructure running and create the rules and environment that allow me to live happily and run a profitable business. I am happy to pay taxes to support the police and military to keep me safe, pave roads to drive on, help prevent the outbreak of horrible diseases, notify me if a tornado is on the way and make a reasonable attempt at creating productive economic citizens out of those who have made poor choices or undergone extreme hardship.
I do not feel that taxes should be used to redistribute money. Insuring that people do not starve while they look for a new job or try to learn a new skill is one thing. Mailing checks to people they can be used on everything from cable television to soda pop is something entirely different.
I know a lot of people are upset because they think that rich people have access to loopholes that aren’t available to the middle class. This is completely true. There are a number of things that the government wants to encourage that rich people can take advantage of. This includes things like starting businesses, creating jobs, using land for certain purposes, making capital investments, and a variety of other things that are generally good for the economy.
What is often overlooked is the fact that the middle and lower class have access to many tax breaks that are not available or useful to the upper class. For example, lets say Joe makes $40,000 per year and he puts $4,000 per year into an IRA. That $4,000 reduces his taxable income by 10% and that savings reduces the amount he has to pay at his highest tax rate. Now lets say John makes $1 million per year and puts $4,000 in an IRA. That would only reduce John’s taxable income by .4%. Hardly enough to make any type of tax savings. (I think there also may be some phase-out regulations that prevent rich people from using an IRA at all.) If you start looking at a Roth IRA for a young middle class citizen the effect is even more pronounced.
Here is another example. In 2009 and 2010, the government will give you a 30% tax credit on the first $6000 you spend on high efficiency upgrades for your home. This includes installing high efficiency heat pumps, high-efficiency windows, better insulation, efficient water heaters, roofs designed to reflect the heat of the sun, etc. Obviously these credits are designed to most benefit people in moderate sized houses. $6000 goes a long ways toward replacing old windows in a 1500 ft.² house. It does very little toward replacing windows in a 20,000 ft.² house.
Another example: If you are a first time homeowner in 2009, you can get up to $8,000 back from the government when you buy your home. (You get back 10% of what you spend up to $8,000). If you buy a $80,000 house, that lowers the price by 10%. If you are buying a $8,000,000 house, the tax break does practically nothing. (There may be some phaseouts for people in high income brackets.) Even then, the credit is designed to help people who have never owned a house–this probably doesn’t describe very many wealthy people. (Oh, and the credit is “refundable” which means you get it even if you didn’t pay $8,000 in taxes–the government will either lower your tax bill by $8,000 or just cut you a check.)
So why isn’t everyone clamoring about the middle class having too many tax breaks? Simple. The middle class doesn’t take advantage of the tax breaks that are available.
To take advantage of tax breaks, you have to live below your means. This means buying a much smaller house than what you can afford. It may mean driving an older vehicle. It may mean cutting out extra expenses like cable television. These aren’t the types of things that the middle class is particularly good at doing, but they are the things that give you the flexibility to take advantage of tax breaks just like a rich person.
Well, it is also the ability to pay accountants a good bit of money, rather than using Turbo Tax. It is also using offshore accounts and investments that are not taxed in the same way. I’m not trying to say that the rich are underhanded or inherently bad. But I think it is naive to say that all of the tax loopholes are just things that allow the rich to help the economy.
And 30% of $6000 is the same amount of absolute dollars whether you are rich or middle class. It may mean more to the middle class person, but it is the same amount of absolute dollars. So I’m not really sure how that is a benefit that is skewed toward the middle class.
@Ethel – While there are some strategies rich people can use to avoid taxes that aren’t available to middle class they are still paying a lot in taxes. 60% of the taxes in this country are paid by only 5% of its residence.
If we wanted to go to an absolute dollars type tax where everyone pays the same amount in taxes, I’m sure we’d have complaints. Since the tax is setup to tax you more the more you make (regardless of how much government you actually use) it seems that the discounts and tax rebates should do the same thing, but that isn’t the way many of them are setup. My point is that there are many, many tax advantages that really don’t benefit the rich–they are only useful to people in the middle class or lower bracket. However, many of the people in the middle class can’t take advantage of these breaks because they are maxed out on their spending.
Hi Mark – you are absolutely right that there are a lot of available tax breaks for the middle class.
The bad news is that Joe making $40K/yr – even if he has no dependents – will have a heck of a time paying to house himself, get health care (that could potentially consume 10 – 20% of his gross) and if he took the initiative to educate himself, student loans, etc – you get the idea.
We live in an era in which technical marvels are cheap and the essentials of a decent life are costly . On top of that, middle class incomes are stuck (in real terms) somewhere in the mid-80s.
So, I agree we have opportunities to save on taxes, but in reality, nearly impossible to take advantage of.
Great post, as usual!
Pity the poor rich person. If only rich people had some way to influence policy. It’s so sad to see an entire class of people disenfranchised like that. And all of this is happening as the foolish and wasteful middle class squanders the vast majority of their income on silly things like housing, transportation, food, clothing, and education.
Time for a Modest Proposal a la Jonathan Swift. Eat the middle class.
You start by talking about not wanting to discuss the optimal tax structure, and then proceed to discuss ways in which our tax structure is not optimal. I’m confused.
Then your comment above appears to be saying that the government should give you more of a tax break as your level of income increases. Do I have that right? That sounds completely insane to me so I want to be sure I’m not putting words into your mouth.
And people aren’t clamoring about the middle class getting too many tax breaks because median wages have remained stagnant for decades. I thought everyone knew this.
Wouldn’t a more complete list of all these middle class goodies have been more helpful? Or perhaps a few real life examples of living below your means?
Normally I’m with you guys 100% though, so keep up the good work.
@Mike – I meant I wasn’t going to talk about whether or not income should be taxed in the first place. My point (which evidently wasn’t very clear) is that people spend too much time complaining about rich people having tax breaks and not enough time taking advantage of the many tax breaks they have themselves.
Personally I think we would be better off if we could get back to the mindset that we pay taxes for the services our government provides us. Under that type of scenario someone who makes $50k would pay less than someone who makes $1 million, but not that much less. As it is, we have a mentality that the government owes some people and some people owe the government instead of everyone “paying for what they use.”
Thanks for your comment. It is good to get feedback on stuff like this.
@Mary – Maybe it is different where you live, but I see lots of people around here who have allocated so much of their income to buying cheap technical marvels that they don’t have anything left to pay for essentials or to take advantage of opportunities that come their way.
My husband likes to point out that we don’t really tax the rich – we tax people with high incomes. That’s not the same thing.
Generally, people with high incomes are taxed a higher rate than people with a lot of accumulated or inherited wealth. In other words, we tax the people who are working hard to become rich more than we tax the people who are already rich.
@STL Mom – Good point. It always seemed to me that having people earn money in your country is a good thing and will help the economy. I think we would be better of taxing spending. In the long term a country with many residence who are saving money is going to be more wealthy as that money will be invested in creating new opportunities (jobs, research, etc.).
Unfortunately this requires a longer term view that what government usually takes. So instead we give deductions for spending and tax people who are making money.
I have to agree with both sides of this debate. If everyone were able to take advantage of the tax breaks, they would benefit the lower classes more than the upper classes.
One issue is that the definition of “middle class” and “lower class” need to be revised. When I was growing up in the 80’s, middle class could easily mean someone making $40,000/yr. In fact my parents made about $35,000/yr and we lived fairly decently. Now, the definition needs to move up a ways.
I’ve made about $27,000 – $30,000 a year, and am barely able to make ends meet. My monthly income after taxes was around $1,100. Almost $850 of that went to reoccuring monthly bills (rent, utilities, phone, internet, cable with rent and utilities being the highest portion) which left the rest for food, gas, maintenance on my car, and whatever other expenses came up.
My point by all of this is that while in the 80’s, $1,100/month was a lot of money and got you a long ways, now it’s not very much. Especially when it takes $40.00/wk or more to fill up your car (and I have a small car– not an SUV). So while those tax breaks are there, it’s a lot easier for the “Middle class” (as it should be defined now) and the “Upper Class” to take advantage of them.
You are entirely correct though in that they need to live within their means. If you have 3 people in the house, there’s no need for a 5 bedroom 3 bathroom house. Assuming that two of them are married, a 2-bedroom or 3-bedroom is more than enough. And you don’t need an SUV or anything more than a smaller car to travel in.
I also totally agree about the food stamps and government checks going to soda pop and snack foods. There should be a strict list of things that you can buy with those. I watched three women buy 4 1-liter bottles of pop, candy, ice cream bars, and chips the other day. The two that paid used their Food Stamp cards to pay for the items. Not one of the things they purchased would be considered “good nutrition” by any means.
Sorry for the long rant, but there’s a few things I felt needed to be said.
Have a great day:)
Patrick.
@Patrick – The definition of “middle class” has a lot to do with where you live as well. $40k per year is quite a bit of money in some rural parts of America, but near the poverty level in San Francisco.
Rich maybe paying 60% of taxes but they are paying about 13% rate based on income, compared to 30% rate for most middle class. This is from a article on warren buffet’s tax return, I am unable to find the link. Rich have more loopholes, I know so because I have been on both sides.