Is Something Missing from the Way We Look at Tax Rates?

There’s been a lot of ink spilled on the subject of tax rates for each income distribution. Calls of “class warfare” have been sparked by President Obama’s recent tax proposals and the Occupy Wall Street protests.  In some media circles, the conventional wisdom put forward, as far as I can tell, has fallen on the “Rich people pay more of there income in taxes, so it wouldn’t be fair to increase their taxes”.

Well, I thought I’d have a look at the numbers.  There’s a lot of different numbers floating around out there, but most seen to fall (at least in a directional sense based on income bracket) along the IRS numbers for 2009 (a formated version of which I got from the nice people at the Tax Foundation, taxfoundation.org).

Taking a look at the effective tax rate per income bracket:

At first blush, most of the numbers I came across (to a greater or lesser degree) followed the same pattern.  The rich were paying a higher tax rate!  But then as I thought about the analysis, I felt something was missing.    The calculation is based on Adjusted Gross Income.  This is basically what people can put towards discretionary and non-discretionary spending less certain specialized deductions.

What if you adjusted the income further to account for non-discretionary cost.  What I mean is what happens if we subtract the amount needed to meet the basic needs of living.  What would the “effective tax rate” on discretionary spending be then?

What should be the number to meet basic needs for a household?  The federal poverty level of about $22,000 for 2009 numbers seemed like a joke.  The good people at the Nationa Center for Children in Poverty (www.nccp.org) suggested “Across the country, families on average need an income of about twice the official poverty level, or roughly $40,000 for a family of four, to meet basic needs. In a high-cost city like New York, the figure is over $50,000, whereas in rural areas, the figure is in the low $30,000s”. 

So after taking the $40,000 number and subtracting it from the AGI, the “effective tax rates” look like:

Much different picture than before (I put the bottom 50% at 100% as their adjusted gross income is now a negative number!).  Even the 25 to 50 percent are at 38% while the top 5% are only at 17%.  I would believe taxes would impact what’s left over to a greater degree.

The current system appears to place a huge burden on the poor & middle class’s discretionary spending.  I believe this impacts their abilty to marshal their resources beyond what is needed to cover the basics to improve their lives and the lives of their children.  While the top percentiles are far less burdened.

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