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Wednesday, March 24, 2010

LIVING OUTSIDE THE BOX: The $100,000 Mid-Sized Family Sedan. Just What Taxes are Really Fair?

Living Outside the Box with Joe J. Wallace

The healthcare bill has been passed and a host of new taxes, fees, and mandatory purchases has been passed into law to pay for the benefits. I was just listening to a respected economist describe how in the cities and states with the highest marginal tax rates in the country will now be taxing that last dollar at a 60% rate. I began to ponder on the question of just how much does it cost to purchase a standard middle class item today like the traditional mid-sized sedan.

In order to be able to drop $100,000 on a mid-sized family sedan like a Toyota Camry, a Honda Accord, or a Government Motors (GM) product like a Chevy Malibu, it is necessary that you are currently earning a sufficient amount of money to place you in the highest tax bracket. Without consulting the IRS, I will take President Obama at his word that these new taxes only kick in at $250,000 annual income or above. The truth of that will be the subject of other articles. You would also have to live in a city that has a high local income tax. Then your local sales tax should be sufficiently high to cause your transaction to be a highly taxed upon sale. For my example, I have chosen Calabasas, CA that has a 9.75% sales tax.

If you get a $100,000 raise or bonus after the new taxes are enacted your take home pay from that $100,000 will yield at the net amount available to you of $40,000. What can you buy for $40,000? Considering that automobiles are subject to sales taxes and license fees upon purchase in a city that has taxes like Calabasas does, you should be shopping for a car with an MSRP of approximately $35,000. If you want to keep some cash on deposit and finance, the car my Texas Instruments BA II-Plus calculator tells me that after interest charges over five years you should be shopping for a car with an MSRP of $29,433.

How many people realize that with such levels of taxation your earnings retention in products and services at the highest marginal rates of taxation is only 35% of your earnings? At some point taxes can get so high that there is no incentive to bother to earn additional money. Progressive taxation, especially on income, inherently rewards failure and punishes success. Let us consider the types of taxes we pay and examine whether they are fair or not.

Sales Taxes: If one does not buy, one does not pay, this tax is therefore voluntary. The sales tax is only dependent on the amount of the purchase, so an extremely wealthy person will pay the same amount of tax on an individual item as someone who earns less. Whether you like paying sales tax or not, this tax is both fair and equitable.

Real Estate Taxes: These are taxes upon property and are nearly always based on the value of the house. To an extent one knows the tax rates prior to choosing the type of house to purchase, we all have some control over the amount that we choose to pay. This tax is not optional as even renters pay this indirectly due to the fact that landlords pass this cost along to tenants. For example, the recently passed healthcare bill levies a 3.8% tax on rental income. Rest assured that if your rent is $1,000 now that it will be rising to $1,050 soon to cover the $38 in taxes and the aggravation that landlords will have with the new tax.

While being less fair than the sales tax, the real estate tax in itself is somewhat fair, and can be altered by the actions of the taxpayer. The authority of a taxing authority to confiscate real estate for back taxes of say 5% of the value of the property is not only unfair, it is usury.

Social Security and Medicare Taxes: To many people’s great surprise there is no lock box full of money anywhere to collateralize the government’s obligation to provide Social Security and Medicare benefits. This is a tax that is designed to have today’s workers pay today’s retirees. It is a classic age-based redistribution scheme. When enacted, there were something like 42 workers for each retiree. Today that number is just over 3 workers per retiree, and is projected to approach 2 as the baby boomer generation retires. This is designed to fail unless benefits are reduced, taxes are raised, retirement ages are raised, or we magically come up with 100 million new workers. This entitlement is the biggest ticking time bomb in the government’s unfunded box of IOU’s.

In spite of its spiral toward insolvency, Social Security taxes each dollar equally up to an annual maximum. There is also a cap on benefits that supposedly is proportional to the maximum in withholding. So the conclusion with respect to fairness is that Social Security is both a fair and equitable tax so long as it maintains its ability to pay.

Income Taxes: The American income tax is progressive in nature imposing progressively higher rates of taxation on higher earnings up to a maximum rate. Forty-three states also tax incomes with schemes varying from Indiana’s flat rate to New York’s progressive tax that mimics federal schedules. What we get for our taxes, or contributions as IRS documents like to call these taxes, is legislation, protection, public land access, redistribution of wealth, a social safety net, roads, and a plethora of subsidized programs such as the SBA, farm subsidies, community block grants, etc. For the purpose of this evaluation, I have assumed that we each have exactly the same services available to us. Some of us take advantage of government largesse and others do not. We all have equal opportunity to do so.

To truly understand the fairness or unfairness of the income tax, let’s assume first that the government is the sole purveyor of eggs, an item that most of us like, in the category of food, that we all need. In a progressively priced grocery store, the price of eggs would most likely have the following form.

Your Earnings

Your Price for a Dozen Eggs

$0 - $50,000

Free Eggs for You

$30,000 - $70,000

$3 per dozen

$70,000 - $150,000

$20 per dozen

$150,000 +

$100 per dozen plus $1 per $1,000 of income

This method of pricing items in a retail establishment that hopes to be taken seriously would yield nothing but laughs. Unfortunately, this is exactly how our progressive income tax works with respect to paying for government services. The income tax in its present form is therefore unfair and not equitable; it was never designed to be. As long as this tax is low enough to only be an annoyance to the highest earners this unfairness will continue.

It is the progressive income tax that created the $100,000 mid-sized sedan. As preposterous as a $100,000 Chevy Malibu sounds, it is today’s reality. Considering the direction that the country is headed in, we will soon have the $200,000 Malibu followed by the $500,000 Malibu. At some point it becomes pointless to earn additional money for the group of people that Ayn Rand in Atlas Shrugged affectionately called the "producers and achievers." At that point the moochers (net receivers of government money) and looters (government officials) will learn the true value of what they have to offer, when the producers and achievers leave the country or just stop working.

Enjoy the $100,000 mid-sized family sedan while you still can. The looters are on the march and there are enough moochers to keep them in office. The payback will come when another country takes up the mantle that our founding fathers did over 200 years ago, and the achievers leave our shores, just as the achievers of the past flocked to them.

For more information, please visit Joe's TNNW Bio.


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