 
When Taxes Take 64 Percent of a Family's Pay Hike
Marginal total tax rates on some middle income families are as high as 64 percent. Such rates are unfair and unreasonable, and constitute bad fiscal policy as well.
by Jerome F. Winzig
Although advocates of big government are loath to admit it, when tax levels get too high they become counterproductive. Some find ways to exempt their income from taxes, even when that means unwise economic choices. Others lobby for tax breaks. Still others look for ways to take their income off the books by bartering or otherwise concealing their income. If taxes go even higher, some may even become discouraged and chose to work less.
None of these results are good for the economy or for the nation. It would seem, then, that government would back off from its tendency to increase taxes when the level of taxation becomes extreme.
Most Americans agree. A 1995 "Reader's Digest" poll asked Americans: "What is the highest percentage of income that is fair for a family of four making $200,000 to pay in all taxes?" The median response--across racial, economic, age, sex, ideological, and educational lines--was 25 percent. A 1996 GrassRoots Research poll yielded the same result: 25 percent.
Why then are we taxing the pay hikes of middle income Americans -- people with family incomes under $100,000 -- at rates approaching two-thirds of the increase? Perhaps it is because our tax structure and our system of withholding taxes from our paychecks conceals the true level of marginal taxation -- the taxes on every additional dollar of income.
Consider the case of a middle class American family that had a good year in 2000. Their gross income went up by 13.34 percent before taxes and social security. It was a nice increase, but even with both husband and wife working, it didn't move their gross family income into six figures.
However, it was enough to move them into the 28 percent tax bracket for federal income taxes. That cutoff comes when taxable income exceeds $43,850. That tax bracket jump, combined with social security and state and local taxes, meant that 64 percent of the family's increase was taken by the government.
How was that possible?
First, social security took 21.12 percent of the increase. That's because both wage earners in this family were self-employed and so had to pay social security at the rate of 15.3 percent. In addition, almost all of their income this year was subject to social security this year because their interest, dividends, and capital gains were much smaller.
Second, increased federal income taxes took 33.49 percent of the total. While the stated tax rate is 28 percent, the family lost two-thirds of the college education credit because their youngest child is now past the first two years of college. In addition, they no longer qualify for the student loan interest deduction.
Third, increased state income taxes took 6.66 percent of the family's increase, increased local property taxes took another 1.51 percent, and increased state sales taxes took another 1.28 percent.
Those increases add up to an astonishing 64 percent of their total increase, leaving just 36 percent of the increase for the family to spend or save. And it will get worse in the future. This middle class family is just $13,000 away from the Alternative Minimum Tax. Passed by Congress decades ago, the AMT was supposedly designed to nail a handful of millionaires who used tax loopholes to avoid paying taxes. In 1970, only 19,000 people had to pay the AMT. By 2007, that number is expected to rise to 8.7 million.
Such levels of taxation are not only unreasonable and unfair, but they are bad social and fiscal policy as well. By punishing the middle class, they weaken the economy and ruin the chances of those at the bottom of the economic ladder.
 
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Minneapolis, Minnesota
USA
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Northern City Journal
