Monday, February 14, 2000
Quest for fairness begat U.S. 46,000-page tax law
BY AMY HIGGINS
The Cincinnati Enquirer
Say you're married. And the two of you jointly earned $70,000 (after deductions) in 1999. That would land you smack in the middle of the 28 percent federal tax bracket.
But that does not mean that you pay 28 percent of your income — $19,600 — in taxes.
That means part of your income is taxed at 28 percent, part is taxed at 15 percent, and part isn't taxed at all.
Yes, it's confusing and misunderstood. But as you hunker down with your stack of numbered forms and sharpened pencils preparing for the April 17 filing deadline, take solace that it's a system actually designed to be fair.
Still, what started as a tax that only one in 241 had to pay in 1913 has turned into an ordeal that almost every American needs to undergo at some point.
|
FIND YOUR TAX BRACKET
|
|
Here are the tax brackets for figuring out your federal income taxes for 1999. Income figures refer to taxable income (income after subtracting exemptions and deductions). Tax brackets don't include 6.2 percent tax for Social Security and 1.45 for Medicare.
Married filing jointly (standard deduction is $7,200, and each personal exemption is worth $2,750).
• Over $0 - but not over $43,050: 15 percent
• $43,050-$104,050: 28 percent
• $104,050-$158,550: 31 percent
• $158,550-$283,150: 36 percent
• More than $283,150: 39.6 percent
Married filing separately (standard deduction is $3,600, and each personal exemption is worth $2,750).
All income amounts in all brackets are one-half those for married filing jointly.
Single filers (standard deduction is $4,300, and each personal exemption is worth $2,750).
• Over $0 - but not over $25,750: 15 percent
• $25,750-$62,450: 28 percent
• $62,450-$130,250: 31 percent
• $130,250-$283,150: 36 percent
• More than $283,150: 39.6 percent
Head of household (common filing status for single filers with dependent children; standard deduction is $6,350, and each personal exemption is worth $2,750).
• Over $0 - but not over $34,550: 15 percent
• $34,550-$89,150: 28 percent
• $89,150-$144,400: 31 percent
• $144,400-$283,150: 36 percent
• More than $283,150: 39.6 percent
Source: Internal Revenue Service
|
Law too fair?
“The hyper-complexity of the tax code has developed because Congress and the IRS often take this concern with fairness too far,” said Paul Caron, associate dean for faculty research and Charles Hartsock Professor of Law at University of Cincinnati College of Law.
The first American income tax was levied in 1862 — a one-page emergency measure to pay for the Civil War. After that tax lapsed and another was deemed unconstitutional, the 16th Amendment was ratified, and permanent income taxes hit the United States.
But even then, the tax levied that year imposed only a 1 percent tax on those with a net income above $3,000. A $1,000 exemption was allowed for a husband or wife, but not both. That tax, as is today's version, was intended to get more money from those making more money.
Mr. Caron said the U.S. income tax system was built on two notions: first, that it's “fair” to tax people according to their ability to pay; and second, that “income” is the best measure for determining ability to pay.
Inefficient, impractical
That notion of fairness, however, also led to changes over the years that makes the tax system inefficient and impractical, Mr. Caron said.
It took just 16 pages to explain the tax code then. Today, it takes about 46,000 pages.
Ellen Boling, tax director in the Cincinnati office of Deloitte & Touche, said there's another reason the tax code gets complicated: The government's desire for more revenue.
Look at deductions: The more you have, the less income you pay tax on. The more you have, the less money the government gets. For example, you can deduct medical expenses from your income only if they exceed 7.5 percent of your income.
Certain deductions also get
phased out at higher income levels. That's part of the fairness effort — if you earn more, you should pay
more. But it's also political. By allowing you to deduct less, they are getting more tax revenue without the unpopular move of raising tax rates.
“That's what a lot of the tax changes have been about,” Ms. Boling said. “But people struggle with why they're not getting deductions.”
|
TYPES OF TAXES
|
|
According to George Vredeveld, director of the University of Cincinnati's Center for Economic Education, taxes generally fall into one of three categories. They are either regressive, proportional or progressive. The defining factor is based on what percentage of income goes to the tax.
• A regressive tax hits lower-income people more. Cigarette taxes might fall into this category because you'll pay the same dollar amount whether you make $20,000 a year or $100,000 a year. That tax, in dollar terms, would be a higher percentage of the lower income level.
• A proportional tax levies the same percentage on all income levels. Some proposals for a flat income tax are proportional taxes.
• A progressive tax is like the federal income tax system. It is supposed to take a higher percentage of income from those having a higher income.
The federal income tax system is also a marginal rate system, meaning that the rate in your tax bracket is the one levied on your last dollar earned. If you are married filing jointly and your combined income (after deductions) last year was $110,000, then less than $6,000 of your income was actually taxed at 31 percent. The rest was taxed at the lower 28 percent and 15 percent rates.
|
Incentives to spend
Ms. Boling said the tax system also creates incentives for people to take certain actions. Keep looking at deductions: People might buy more homes because the mortgage interest is deductible; people might contribute more to regular IRAs because some contributions are deductible, and most earnings are tax-deferred; and people might give more money to charity because it's deductible.
“If somebody, say, gives $1,000 to charity, they'll save $280 in taxes” if they're in the 28 percent bracket, Ms. Boling said. “It would only cost them $720 to make a $1,000 donation.”
Even the taxes that are levied, however, can change behavior. People taxed at the higher marginal rates might have less of an incentive to work harder, earn overtime or buck for raises if they know that as much as 39.6 cents of that extra $1 will go to the federal government.
Capital gains shrinkage
But lowering the capital gains rates and shrinking the amount of time needed to qualify for the lower rates might encourage more people to sell stock. People can then keep reinvesting and keep the market liquid.
Another behavioral change: Calling an accountant to deal with all of this.
“People just don't like having to gather details and data,” she said.
Quest for fairness begat U.S. 46,000-page tax law
Tristate companies want Junior to pitch
YOUR MONEY
ASK THE MONEY PANEL
PEOPLE ON THE MOVE
