It seems that many people love to complain about taxes, both how much we pay in taxes and how the government uses our tax dollars. I’ll save the government’s handling of tax revenue for another day.
I’ve been thinking lately about tax rates. What is the fairest system for collecting taxes? On one hand, the simplicity of a flat income tax or a flat consumption tax appeals to me. On the other hand, I also see value in a system like ours in which the wealthier you are, the greater your tax rate is, at least in principle.
This recent article in the Dallas Morning News confirmed a few suspicions I’ve had. I invite you to read it and then come back.
If you don’t feel like reading it, the article discusses the huge amount of tax revenue that the government loses every year through common tax breaks such as mortgage interest. Most of these tax breaks go to middle- and upper-class people who can afford to own a home, invest money, and contribute large amounts to charity. In general, the more money you make, the more you can claim in deductions on your more expensive house and other items. Eliminating all of these breaks would make a huge dent in the budget deficit.
Intrigued, I ran some numbers on our family’s finances. We’re just regular, middle-class people with two
living tax credits kids and a reasonably-priced home. We’re in the 25 percent tax bracket. However, we take many legitimate deductions every year, including mortgage interest, property taxes, student loan interest, and a variety of charitable donations. For 2009, we also claimed some capital losses (bad stock picks – oops) and a home energy improvement credit. These deductions and credits saved us thousands of dollars last year. How much?
Our effective income tax rate was only 11.3 percent. That sounds a whole lot better than 25 percent, doesn’t it?
But does it? Sure, it’s great to keep the difference in my pocket. And yes, some would argue that even 11.3 percent is too high. However, I understand and appreciate the government’s contributions to my life and the life of every American, and I think it’s only fair that we pay for them. All my deductions contribute to the massive budget deficit.
I don’t have a comprehensive plan for tax reform, nor do I have any intention of reducing my deductions to help solve the budget crisis. I just wanted to point out that our actual tax burden might not be quite as heavy as we might think.