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ETpro's avatar

Rate hike or deduction reduction, why does it matter?

Asked by ETpro (34145 points ) December 8th, 2012

If you’re in the top 2%, and the net result of a rate hike or a deduction reduction is that you end up paying $10,000 more in taxes either way, why the big fight over whether the $10,000 comes from a tax rate increase of the removal and/or capping of tax deductions? Isn’t $10K $10K either way?

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7 Answers

Judi's avatar

Because they want the middle class to feel it too so the world sees their “sacrifice.”. I think they should bring back the credit card interest deduction that would really help the middle class right now.

Jaxk's avatar

The difference is who pays the extra tax. Say you have two guys that each earn $500K. Guy A doesn’t do anything extraordinary, he has a modest house or rents, doesn’t have any real tax breaks and pays $100K-$150K in Federal income tax. Guy B does everything he can to minimize his taxes. Carries huge mortgage and even when he buys a new car, he does it with his home line of credit so he gets the interest deduction. Invests in anything that will give him a deduction and pays maybe $20K-$50k in income taxes. If you raise the tax rate guy a will see his taxes go up by $12K-$15K while guy B won’t see any increase. If you limit the deductions it will be Guy B that bears the burden of the tax increase.

The difference is in which behavior do you want to incent or penalize. The guy that leverages his tax loopholes or the guy that pays his fair share?

ETpro's avatar

@Judi I’m ambivalent about that interest deduction on credit card debt. Yes, it stimulated consumer spending, but it seemed to do so at the expense of sound fiscal behavior. With interest rates fluid, a surge in inflation can send the rates soaring. When lots of people carry 2 to 3 times their annual income in debt, that leads to a mass of bankruptcies.

@Jaxk Great answer. There are some behaviors that current deductions incentivize that would probably better be discourages, like buying things using a home line of credit and thus getting a deduction on them. But a great deal of what write-offs target, like charitable giving and education, make perfect sense. Leave the good stuff off the table and the math doesn’t work to get to the revenue we want. Do rate increases alone, and you don’t simplify the tax code or fix what’s currently wrong with the penalize/incentivize equation. Seems to me a combination of both approaches would be the best way to raise revenue for deficit reductions.

Jaxk's avatar

@ETpro

Sounds like you’re on board with the Obama plan which is to do both. Unfortunately I don’t see much if anything in the way of deficit reduction. Raising taxes won’t create a single job nor reduce the debt by a single penny. The tax hike is political, nothing more.

Judi's avatar

I always thought that Obama should have hired McCain right after the election to go into the Pentagon and clean up waste. There are so many sacred cows in there that are just pet projects for politicians. If someone had the guts to make the military leaner and meaner we would probably be more effective for less money. (someone who knows, how much is just 10% of the military budget?)

ETpro's avatar

@Jaxk I’ve heard that mantra, but believe reality more than any political ideology. Neither tax increases nor decreases always increase revenue, thereby reducing the deficit. You’d get the same revenue from 100% taxes or 0%, that being zero revenue. Somewhere in between lies the sweet spot. Tax rates are at the lowest rate now they have been in 80 years and revenue as a percent of GDP is way down from what it was when the rates were higher, so we are below the sweet spot.

Same goes for spending. Spending either 100% or 0% of GDP is insane. Again, we need to find a sweet spot where we have the government we need. There are no fewer jobs supported when the federal government buys a fleet of 100 step vans than when UPS buys them. And the money for either comes from other people. Money isn’t magic. It really doesn’t know who is spending it and act differently when evil government is doing the spending.

@Judi I don’t think John McCain has ever met a military spending program or a possible war he didn’t love. The 2012 US Military budget is $711 Billion. As we wind down the Afghan conflict, there should be substantial savings available from that without compromising military readiness.

Jaxk's avatar

@ETpro

I’m not sure what you’re trying to show with that revenue graph. It is not a revenue graph but rather a chart of tax rates. There is nothing to indicate the tax revenue on that chart. Here is a chart of federal revenues as a percent of GDP from 1960. And we need to look at all government (fed, state, and local) as a comparison which you can see here.. If you compare your tax rates against tax revenue, you will see that revenues increase regardless of the lower rates.

The big difference here is that you’re trying to make systemic changes during a recession. The one thing that stands pretty clear is that raising taxes AND lowering spending will be a disaster. We tried that in 1937 and it doesn’t work. I know you don’t believe that the debt is a problem while I believe it is a major problem. Taxes extract money from the economy the same way lower spending does. If we do both we are asking for disaster.

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