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Thursday, January 24, 2008

TAXES AND CANDIDATES AND LIES OH MY 

TAXES AND CANDIDATES AND LIES OH MY

Call me cynical if you will, although I prefer being tagged as a skeptic if I am categorized by my view of political pronouncements. Frankly, I follow my father’s advice, when he told me to believe nothing that I read or hear, and only half of what I see. If I cannot prove a statement by any politician to my satisfaction, I consider it a misrepresentation at a minimum, or an outright falsehood at the worst. And when it comes to politics, there are more falsehoods than exaggerations.

One of the most repeated claims today by many in politics is that the tax cuts initiated by President Bush benefited the wealthy and major corporations, with little or no benefit to the middle class and lower income people. These tax cuts are due to expire in 2010, and the only constant I am hearing from the Democratic candidates is that they all intend to allow these cuts to expire. The current leadership of both the House and Senate, now controlled by Democrats, agree with the candidates and want these “unfair” cuts to expire.

I am not stuck on stupid, so I understand that if you give the same break to the middle class that you give to the upper income population, the wealthy will keep more money than me, as they have more to begin with. Cut the taxes on my middle class income at the same rate as someone in a much larger income bracket, and they will get greater benefit in actual dollars saved. However, my skepticism comes into play when politicians say that the middle class was not treated equally with upper income taxpayers by these tax changes. It took me ten minutes to establish the facts to my satisfaction, and I challenge others to follow my example, and see for yourself what happened when the tax rates were adjusted under the Bush tax changes.

Step 1 – Pull out a copy of your Federal tax return for 2002, the last year before the changes to the tax rates took effect. Write down just two figures; your taxable income and the amount of tax you paid.

Step 2 – Divide the amount of Federal tax paid by your taxable income. This will give you the actual percentage rate of taxes you paid in 2002.

Step 3 – Pull out a copy of your Federal tax return for 2006, the most recent year where the revised tax rates have been in effect. Again, write down just two figures; your taxable income and the amount of tax you paid.

Step 4 – Divide the amount of Federal tax paid by your taxable income. This will give you the actual percentage rate of taxes you paid in 2006.

Step 5 - Subtract the 2006 tax rate from the 2002 tax rate. Did the rate go up or down?

Please let me share the actual results of this exercise when my wife and I did this. In the interest of full disclosure, we used our 2005 Federal return, as that was the last full year I worked before retiring halfway through 2006.

In 2002, on a decidedly middle class income, we paid a Federal rate of 17.9 percent. In 2005, we paid Federal taxes of 13.6 percent. Our tax rate had dropped 4.3 percent. In other words, our Federal tax burden was reduced by a substantial 24 percent. Actual income was not a factor, as our taxable income had only gone up 1.6 percent from 2002 to 2005. There also was no change in dependants (our five children are all adults), nor any significant change in any other deductions or credits as evidenced by the very small increase in our taxable income. During that three year period, my income remained flat, and my wife received only a modest raise.

The bottom line is that the tax cuts had a sizable impact on the Federal taxes we paid, and that impact was beneficial. Should we elect a presidential candidate committed to allowing these cuts to expire, with a sympathetic congress that also believes these favorable cuts should go away, I have no doubt that my wife and I will pay more in 2010 than 2009, even if there are no new taxes or raises in existing taxes, simply because we would go back to the 2002 rates. Before you nod in agreement when you hear the candidates talk about unfair tax cuts, please take this simple five step test yourself, and then decide if what you are being told is true or not.

When considering how my wife and I will vote in 2008, one factor that will come into play is simply this. If we have a Democratic President, and a Democratic congress, they have already told me that my taxes will go up 24 percent. This may be one time when candidates are telling us the truth.


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