Bush Tax Cuts Set to Expire

Amongst other things, President George W. Bush was famous for cutting taxes, spending money, and running up the deficit.

While his tax cuts reduced taxes on most if not all citizens, they really helped the super-rich with most of the benefits going to them. In fact, it could be argued that his tax cuts facilitated what might be the greatest transfer of wealth in our nation's history. Of course this transfer of wealth went upwards, from the lower- and middle-class to the upper class where we now have one of the highest concentrations of wealth in the world.

While President Bush certainly wanted his tax cuts to be permanent, passing temporary cuts made them appear less costly to the U.S. Treasury, and provided Republicans a future opportunity to make them permanent. That time is now. Most of those temporary tax cuts expire in 2010.

This is going to be a huge battle. The Republican talking points state that allowing the Bush tax cuts to lapse is the same thing as a tax increase while Obama's plan is to let the cuts expire on high income individuals while reducing taxes on average working families.

Who do you believe? How will these tax changes effect you?

The good folks over at the non-partisan Tax Foundation created the website MyTaxBurden where you can enter some tax information and see your tax obligation three ways:

• pre-Bush tax cuts (the system we'll return to if Congress fails to act)
• Bush tax cuts (what will happen if the tax cuts are extended)
• Obama's budget plan (What he ran on and what he's proposed)

I hope you'll check it out and I'd love it if you posted your results here.

US tax system not perceived as fair according to report

Yesterday I provided some information from The Tax Institute at H&R Block’s annual survey of taxpayers. The study found that most Americans weren’t very knowledgeable about the tax laws that impact their pocketbook and should inform their financial decisions.

What I didn’t report, and what I found more interesting, was the finding that a whopping 92 percent of those taxpayers surveyed could not describe the U.S. tax system as "very fair." While “very fair” may be a high threshold, it shows me there is a lot of room for improvement since the best tax systems are perceived as fair.

To me, the fairest system is a progressive system with increasing marginal tax rates. Increasing marginal tax rates means that tax rates increase as income increases, but only at the margin. For example, if marginal rates increased every $50,000, then the first $50,000 everyone earns would be taxed the same regardless of total income, while those who made between $50,001 and $100,000 would pay slightly more on that income than on their first $50,000. In this example, the marginal rate would go up until it reaches the maximum rate.

The theory behind this is based on the utility of money. The less money you earn, the more valuable and vital each dollar is to you, while the more you earn decreases the utility of the subsequent dollar. A $1,000 to me and a $1,000 to Bill Gates are two very different amounts.

I’ll continue with this discussion the next time I blog.